SMSF member overseas or of unsound mind? Fail Central Management & Control? Lose nearly half of your superanuation.

POAs and SMSFs

To operate a complying SMSF you must usually:SMSF sound mind crazy poa

1. live in Australia; and
2. be of sound mind.

1. Leave Australia: Your Self-Managed Superannuation Fund must satisfy a number of residency tests. One of those tests is that ‘central management and control’ of the SMSF remains in Australia.

However, the ATO allows SMSF members to leave the country for a period of time. But if a member leaves Australia over that time the central management and control test may fail. Then, the SMSF is no longer a complying SMSF.

2. Unsound mind: If you lack mental capacity (e.g. dementia) then you can no longer remain a trustee of your SMSF. And, again your SMSF may go non-complying.

A non-complying SMSF is taxed up to almost half of the fund’s value. A complying Enduring POA may pass control to the desired person. This is when the member is no longer able to act in a position of control. For example, while living overseas or lacking mental capacity.

Is an SMSF a ‘trust’?

A ‘trust’ has a trustee holding assets for a beneficiary. Trusts derive from ancient English law. Obviously, all superannuation funds and SMSFs are trusts. The trustee protects the assets for the beneficiaries. Cowan v Scargill [1985] Ch 270 is an English trusts law case, on the discretion of trustees to make investments for the benefit of their members. It held that trustees cannot ignore the financial interests of the beneficiaries. Sir Robert Megarry states in Cowan v Scargill:

“I can see no reason for holding that different principles apply to pension fund trusts from those which apply to other trusts. Of course, there are many provisions in pension schemes that are not to be found in private trusts, and to these, the general law of trusts will be subordinated. But subject to that, I think the trusts of pension funds are subject to the same rules as other trusts.”

This approach is confirmed in the Superannuation Industry (Supervision) Act 1993 (SIS Act).

If you want to learn more about trusts watch these training videos and read these articles:

ATO taxation ruling for SMSF and POAs

In response to the High Court decision of Bywater Investments Limited & Ors v Commissioner of Taxation; Hua Wang Bank Berhad v Commissioner of Taxation [2016] HCA 45, the ATO published ruling TR 2017/D2. The ruling sets out the Commissioner’s considered view on how to apply the central management and control test of company residency.

While the draft ruling is not SMSF-specific, it affects the application of the ‘residency test’ and therefore whether overseas holidaymakers continue to operate a complying SMSF in Australia.

Paragraph 17 of the ruling says a person who has power or authority to control and direct a company but does not use it, does not exercise central management and control.

Paragraph 18 says:

In limited circumstances a person may control and direct a company without ongoing active intervention in the company’s affairs provided they:

  • have appointed agents or managers whom they tacitly control to conduct the company’s day-to-day business
  • tacitly control and regularly exercise oversight of the affairs of the company, including monitoring the company’s performance, and
  • do not need to actively intervene because the company’s affairs are running

The ruling makes it necessary for overseas holidaymakers to have their SMSF documents reviewed and updated, or run the risk of having their SMSF taxed at 47%.

Legal Consolidated does not provide advice on these issues. We do not provide advice on Central Management and Control. Your accountant, financial planner and lawyer can build the documents required to start this process:

    • Enduring POA – all Legal Consolidated POAs have the widest possible powers
    • Corporate POA – allows the corporate trustee to operate
    • SMSF Deed – fully compliant with SIS and ATO’s latest rulings
    • SMSF Deed Update – to bring the SMSF up-to-date with ATO and SIS Rules

All SMSF members must be Trustees or Directors of the Trustee – but not always

Section 17A SISA states that all SMSF fund members are trustees or directors of the corporate trustee.

There are exemptions to this blanket rule. However, other persons may be trustees or directors where a member dies, is physically or mentally incapacitated or is a minor. Section 17A(3)(b)(ii)  allows the member’s legal personal representative to be a trustee or director. This is in place of the member during any period when they hold an Enduring Power of Attorney.

Why do SMSF members and the trustees have to be the same people?

What used to happen was that Dad was the sole trustee of the SMSF. The other members, Mum and the children were not the trustees. If Dad made a mistake the wife and children say that it wasn’t their fault. They would argue it isn’t fair for the ATO to inflict penalties on them as innocent parties. The government got sick of hearing that story and changed the law so that every member had to be the trustee as well. (Or, if there was a company, then all the members are the only directors.)

Therefore, the members of an SMSF have full responsibility for the management, administration and investment of the fund. The members control the fund. This causes problems if a member lacks mental capacity. They can’t, therefore, remain as trustee/director of a corporate trustee. In this case, section 17A SIS Act provides the ability to appoint a representative for the suffering member. This is to act in place of the suffering member.

What is a Legal Personal Representative (LPR) for an SMSF for Central Management?

When we talk about an LPR we traditionally associate this person as the executor in your Will. However, under section 10(1) SIS an LPR includes ‘a person who holds an enduring power of attorney granted by a person’.

How does Central Managed and Control work in a Self-Managed Superannuation Fund?

At the heart of the compliance criteria for SMSFs is the residency test. It determines if an SMSF qualifies as an Australian superannuation fund.

Prerequisites for the SMSF residency test.

To establish Australian residency for an SMSF and qualify as an Australian superannuation fund, trustees must satisfy the residency test by meeting the following criteria:

Criterion 1: SMSF Establishment and Assets

The SMSF must be established in Australia or hold assets within the country.

Determining compliance with this criterion is usually straightforward. An SMSF is considered established in Australia if the initial contribution is made to and accepted by the fund’s trustee in Australia. This determination remains valid even if the fund later holds no assets within Australia:

  • Merely signing the fund’s Legal Consolidated SMSF deed in Australia, alone, does not satisfy the criterion. The actual payment and acceptance of the initial contribution in Australia are essential.
  • Alternatively, the criterion can be met if the SMSF holds any of its assets in Australia. Failure to meet this criterion, whether due to a lack of Australian establishment or assets, results in non-compliance with the residency test.

Criterion 2: Central Management and Control (CM&C)

The second criterion focuses on where the central management and control (CM&C) of the SMSF occurs. CM&C should ordinarily take place in Australia, even if there’s a temporary absence overseas. A “safe harbour” provision (Section 295-95(4) Income Tax Assessment Act 1997) allows a temporary absence without jeopardising CM&C in Australia.

But check with your accountant as to whether the CM&C automatically fails after you leave Australia. The safe harbour does not guarantee compliance. Demonstrating the temporary nature of the absence is pivotal.

Assessing CM&C requires careful consideration, involving factors such as the interpretation of “ordinarily” and “temporary absence.” The Australian Taxation Office (ATO) defines CM&C through the strategic, high-level decision-making processes of the fund. This encompasses duties like formulating investment strategies, reviewing performance, and determining asset allocation for member benefits.

Criterion 3: “Active Member” Test

The final criterion examines the “active member” status during the relevant period. Compliance requires that either:

  • No:
    • “active member” exists, or
    • at least 50% of the total market value of assets linked to active members is held by Australian resident active members; or
    • at least 50% of the total payment amount for members hypothetically ceasing membership is attributable to Australian resident active members.

(An “active member” is someone contributing directly or indirectly to the fund. Foreign residents who are non-contributors during the period don’t qualify as “active members,” except when contributions were made while they were Australian residents.)

Preserving SMSF Residency Status

When considering or undergoing an overseas move, SMSF trustees should seek professional advice to understand the impact on SMSF status. Preventing potential residency test failure and the subsequent loss of the concessional 15% tax rate requires proactive measures. Options include:

  • Appointing a Legal Consolidated enduring power of attorney
  • The SMSF Corporate Trustee putting in place a Company POA
  • Selecting an alternate director (for corporate trustee SMSFs)
  • Converting to a Small APRA Fund
  • Appointing additional trustees to balance resident and non-resident trustees
  • Considering a roll-over to an APRA fund or SMSF wind-up
  • Seeking a Private Ruling from the ATO when uncertainty exists regarding residency test compliance

Due to the intricacies and implications involved, seeking professional advice before relocating overseas is strongly recommended. Implementing strategies and maintaining well-documented evidence of temporary absences can help safeguard SMSF residency status. Legal Consolidated does not give advice in this area. This is general advice only.

Avoiding the penalty tax when an SMSF fails the Central Management and Control test

Your accountant, lawyer and adviser will set up what is required using our POAs and Corporate POAs. The members can leave Australia without suffering the non-complying penalty tax on their SMSF. But they need to have completed the paperwork BEFORE they leave Australia. The standard practice is that when you build the SMSF Deed on Legal Consolidated’s website you also build an Enduring POA for each member and a corporate POA for the company.

To be a complying super fund and receive tax concessions you need to be an ‘Australian super fund’. This is at all times during the financial year.

If your SMSF stops being an ‘Australian super fund’ because it does not satisfy the residency rules, it is non-complying. Sadly, the SMSF assets (less some contributions) and its income are taxed at the highest marginal tax rate.

As part of the process, to avoid loss of central management and control a member (the principal) signs a Legal Consolidated enduring power of attorney (POA). This is in favour of a legal personal representative. The person you appoint is called the attorney.

All Legal Consolidated POAs, in all 6 Australian states and 2 territories, comply with the SIS Regulations.

For an SMSF member going overseas do they need a Medical or common law POA?

Medical/Lifestyle POAs and common law POAs do not work. You need a Legal Consolidated Enduring POA.

For an SMSF member going overseas does the Corporate Trustee also need its own Company POA?

If there is a company as Trustee of the SMSF then you also need an SMSF Corporate POA. This is as well as the Legal Consolidated Enduring POA. You need both.

Reasons to hand over control of your SMSF

You must put in place both Enduring POAs and Company POA and ON TOP OF THAT have your accountant do what is required in your individual circumstances to deal with:

1. you living in another country.
2. you just do not want to have the responsibility anymore
3. you are sick
4. you are physically or mentally incapacitated

What is a POA for an SMSF?

Generally, you (principal) empower another person (attorney) to represent you or act in your stead. Your attorney ‘stands in your shoes’. Your attorney, however, cannot do everything. For example, your attorney cannot vote or make a Will for you.

Each Australian jurisdiction has its own legislation governing POAs. There are 8 different types of Enduring POAs in Australia:

1. Powers of Attorney Act 2000 (Tas)
2. Powers of Attorney Act 1980 (NT)
3. Powers of Attorney Act 1998 (Qld)
4. Powers of Attorney Act 2006 (ACT)
5. Powers of Attorney Act 2003 (NSW)
6. Powers of Attorney and Agency Act 1984 (SA)
7. Property Law Act 1969 (WA) and Guardianship and Administration Act 1990 (WA) [A Property Law Act POA does not work for SMSFs]
8. Powers of Attorney Act 2014 (Vic)

Except for WA, all jurisdictions recognise an out-of-state POA:

* Victoria: validly made EPOA made in another State or Territory is recognised in Victoria. Section 138 Powers of Attorney Act 2014 (Vic).
* NSW Enduring POA: POA made in another State or Territory is recognised in NSW. Section 25 Powers of Attorney Act 2003 (NSW).
* SA Enduring POA: Interstate POA is valid to the extent that the powers it gives under the laws of the jurisdiction in which the POA was made could validly have been given by a POA made under the South Australia Act.  Section 14 Powers of Attorney and Agency Act 1984 (SA).
* QLD Enduring POA: A POA made in another jurisdiction that complies with the requirements of that other jurisdiction is recognised to the extent that the powers it gives could validly have been given by a Queensland POA. Section 34 Powers of Attorney Act 1998 (Qld).
* WA Enduring POA: Sadly, the attorney must first apply to the WA State Administrative Tribunal. This is for an order recognising the POA in WA. The Tribunal must be satisfied that the form and effect of the POA correspond sufficiently to a POA made in Western Australia. Section 104A Guardianship and Administration Act 1990 (WA). Good luck with that.
* TAS Enduring POA: A POA ‘registered’ in another jurisdiction validly registered in Tasmania. Further, a POA made in another jurisdiction can be registered in Tasmania. But, only if it complies with the laws of Tasmania or the laws of another Australian jurisdiction. Sections 42 and 43 Powers of Attorney Act 2000 (TAS). However, as a sign of how out of touch the Tasmanian government is, there is no ‘registration’ in any other jurisdiction, other than Tasmania. Only Tasmania keeps a mandatory register of enduring and medical POAs.
* NT and ACT Enduring POAs: recognise POAs and common law POAs. In the Northern Territory and ACT, the interstate POA or common law POA is treated as though it was made under the respective NT or ACT Act.

But in practice, other States do not want to look at an out of State POA

Most land title offices do not acknowledge or even want to look at POAs made out of their home State. They say “we don’t have time to look at strange POAs from other States”. So you have to take the above recognition with a pinch of salt. Banks can barely understand a ‘local’ POA and are also unlikely to want to act on an ‘exotic’ out-of-State POA.

So, contrary to the above list, often an out-of-State POA is not recognised.  Therefore, the SMSF member should prepare additional out-of-State POAs. If the SMSF member does not have the mental capacity to make out-of-State POAs then some State administrative bodies have that power. That is often expensive and time-consuming. You often get mixed results with neighbours and distant relatives sharing their views about you at the Tribunal. I remember, in one case, where the uncle exclaimed ‘he was a horrible child.’

————————————————————————

Free Australian Insanity and POA Tool Kit

Resources to teach you how to use Australia’s 16 different types of POAs:

————————————————————————

Bankrupt SMSF Members and Trustees

When a Trustee becomes insolvent or is declared bankrupt, they are classified as a disqualified person. A disqualified person should not be a Trustee of a Superannuation Fund or a Director of a Corporate Trustee.

Under Section 126K Superannuation Industry Supervision Act 1993 (SIS Act), penalties apply, if a person continues to act as a Trustee of the SMSF after knowing they are disqualified.

Steps when an SMSF member is (bankrupt) disqualified person:

When you become a disqualified person, you:

  1. remove yourself as a Trustee immediately; and
  2. have a short period of time to restructure the Self-Managed Superannuation Fund.

POA and the SMSF bankrupt

Once the Trustees in the Fund are disqualified, they will not be able to appoint a Power of Attorney (POA) to continue managing the Fund as the Fund no longer meets the definition of an SMSF (s17a (10)).

The impact of a trustee/member of an SMSF becoming bankrupt is significant for the member.

The effect of an SMSF trustee going personally bankrupt

Bankruptcy and the superannuation rules

When an SMSF trustee/member goes bankrupt, they are ‘disqualified persons’. This is under the Superannuation Industry (Supervision) Act. You are a disqualified person if you are an undischarged bankrupt. You are insolvent under administration.

You commit an offence if you act as a trustee of your SMSF. Failure to resign immediately as an SMSF trustee exposes you to penalties. This includes fines and imprisonment.

What happens to a bankrupt’s Self-Managed Super Fund?

While you resign as an SMSF trustee:

  1. you do not immediately stop being an SMSF member
  2. your SMSF no longer technically satisfies the definition of an SMSF
  3. but your SMSF has six months where it is deemed to satisfy the definition
1. How to get your SMSF compliant when the member is bankrupt – bankrupt member rolls over his assets to another non-SMSF fund

As a bankrupt, you cash up your asset in your SMSF. And roll over the superannuation money to a non-SMSF. This includes a retail and industry fund. Simple.

But if your SMSF owns a big lumpy asset such as a block of flats in Double Bay, NSW then you cannot just ‘cash in’ a 1/3rd interest in land.

2. Someone acting as trustee on behalf of the individual bankrupt – sorry this does not work

The SIS Act allows someone (other than the member) acts in that member’s place as trustee. But this is only in specific circumstances. Speak to your accountant, adviser and lawyer required this. Legal Consolidated does not give advice on Central Management and Control. Instead, your advisers build the POAs and Corporate POA on our website. This information is of a general nature only. We do not know your individual circumstances.

“Disqualified person” for their SMSF Corporate Trustee?

Usually, the member is not a trustee of their SMSF. They are, instead, normally a director of the company that is the trustee of the SMSF. This is even worse for a bankrupt.  A director who is a disqualified person (including a bankrupt) is not able to continue as a director of the corporate trustee. The corporate trustee is immediately tainted. Under the definition of a disqualified person, the corporate trustee itself is a disqualified person. It is irrelevant that the majority of directors are not themselves disqualified persons.

The disqualified person must cease to act as a director of the corporate trustee immediately. There is no 6-month extension.

Other examples of a ‘disqualified person’ for SMSF rules

As well as an undischarged bankrupt, a “disqualified person” includes:

  • convicted of an offence of dishonest conduct
  • civil penalty order under the SIS Act
  • The Commissioner of Taxation makes an order that the individual is not a fit and proper person to be a trustee of an SMSF

A corporate trustee is a “disqualified person where:

  • A responsible officer (including a director) of the corporate trustee is a disqualified person
  • A receiver is appointed for property owned by the company
  • A provisional liquidator is appointed for the company
  • The company is being wound up

Barry [2024] FCA 13 – everyone in the SMSF went bankrupt at the same time

In an urgent matter brought before Justice Shariff, the ramifications of SMSF compliance were starkly illuminated when all members of the Self-Managed Superannuation became disqualified persons. This was through bankruptcy. Orders had to be swiftly granted merely to enable these disqualified members to proceed with the winding up of the SMSF.

Barry [2024] FCA 13 underscores the importance of getting Legal Consolidated POAs well before disqualification looms. It is a cautionary tale, urging us to familiarise ourselves with the disqualification rules to avoid expensive litigation.

Facts of Barry [2024] FCA 13

A two-member SMSF buys real estate. This is via a limited recourse borrowing arrangement.

Both members go bankrupt. It automatically triggers them as disqualified persons. This is under both:

  • s 206B(3) Corporations Act 2001 (Cth); and
  • s 120(1)(b) Superannuation Industry (Supervision) Act 1993 (Cth) (SISA).

Also, upon their bankruptcy, the members must stop being directors of all Australian companies. This includes the directorship positions in the SMSF trustee company and the bare trustee company.

However, the members operated under the mistaken belief that they retained the authority to sell and windup the SMSF. This included selling the SMSF’s primary asset, specific real estate, and starting the wind-up process. For example, they signed a sales contract. But, of course, this contract is deemed “unsound”. This is because they lacked the status of being directors.

The members signed the contract inadvertently or under a misinterpretation of the legal framework, with no malicious intent. Upon realising their misunderstanding, they petitioned the Federal Court for orders granting them the authority to act as directors, albeit under immediate disqualification, solely to liquidate the SMSF’s assets to facilitate a rollover. Surprisingly, these orders were granted.

Pertinent to this case is the discretionary nature of the court’s orders, which allowed the members to act as directors of the corporate trustee of the SMSF (and the related bare trustee company) solely for actions to wind up the SMSF.

Decision of Barry [2024] FCA 13

Thankfully the bankrupt members obtained the requested orders. This is even though their disqualification persisted. But it was on the basis that the winding up of the SMSF proceeds. Justice Shariff considered the members’ misguided yet honest actions post-disqualification and their clear commitment to winding up the fund and complying with the law to the best of their ability.

Justice Shariff also looked at the members’ intentions in pursuing their chosen course of action. It became evident that their intentions were genuine and not aimed at defrauding creditors. Justice Shariff was satisfied that such actions posed no risk to third parties, including former and current creditors.

The granted orders were confined to enabling the members to act as directors exclusively for the limited tasks of property sale and SMSF wind-up.

A Legal Consolidated POA would have allowed for all this without the need to go to the Courts.

If you have already lost mental capacity – is it too late for your SMSF

Speak to your adviser, accountant and lawyer. We do not give advice on Central Management and Control of SMSFs.