7.98 The legal framework for SMSFs was established in 1999. SMSFs have fewer than five members. Importantly, all fund members are also either individual trustees for the fund or directors of the corporate trustee. As at June 2016, there were 577,236 SMSFs in Australia with a total of 1.1 million members. There are currently over $620 billion in assets managed by SMSFs (about 29% of superannuation assets in Australia).
7.99 Around 70% of SMSFs have two members and 22% are single member funds. The most common structure is a super fund held by a couple. While some SMSFs are established and managed by very wealthy investors, 45% of SMSFs have total balances of less than $500,000. Evidence suggests that some SMSFs are used as part of a family business structure, typically with the business premises owned by the SMSF and leased to the family business.
7.100 The Financial Planning Association noted that
the people who establish and manage their own SMSF are highly engaged with their financial affairs and decision making. They are not forced to establish an SMSF, rather they choose to. And in doing so take on the responsibility and obligations of the SMSF. The regulatory requirements of establishing and managing an SMSF can be complex, so many trustees seek professional financial advice.
7.101 In 2009, the Australian Government established a review into the ‘governance, efficiency, structure and operation of Australia’s superannuation system’, known as the Super System Review Panel (the Panel). The thorough examination of the SMSF sector by the Panel provides context for the recommendations that follow. The ALRC has focused on discrete targeted recommendations that seek to address the issue of reducing elder abuse, particularly among those older people who may have impaired decision-making ability. Recognising the work already undertaken by the Panel, the ALRC does not make broader recommendations affecting the legal and regulatory regime for SMSFs.
Emerging risk of elder abuse
7.102 The ALRC received a small number of submissions raising concerns regarding financial abuse of older people involving SMSFs. Submitters also noted that the rate of non-compliance identified by auditors was low at around 2% of funds.
7.103 The low prevalence of elder abuse in relation to SMSFs may reflect the current demographics of those with SMSFs. Only 8.8% of SMSFs have members aged over 75 years—who may be more at risk of elder abuse given increasing rates disability and cognitive impairment. However, 55% of SMSF members are aged between 55 and 74 years of age. This suggests that, in the coming decades, a greater number of older and potentially more vulnerable individuals will have an SMSF.
7.104 The risk of vulnerability to financial abuse in relation to an SMSF arises in part because the regulatory framework for SMSFs was designed on the premise of self protection. This model for SMSFs supported reduced government regulation:
As members of self managed superannuation funds will be able to protect their own interests these funds will be subject to a less onerous prudential regime under the SIS Act.
7.105 The different regulatory framework for SMSFs and the larger industry and retail funds regulated by APRA was explained in the following terms:
APRA considers they have a responsibility for ensuring trustees [of those larger superannuation funds for which APRA is the responsible regulator] have properly formulated their investment strategies as set out in trustee documentation and that this can be demonstrated through practical implementation…. The Tax Office’s approach is, however, consistent with past Tax Office practice and the Government’s original policy intent. This intent specified that whilst SMSFs are a key vehicle in the accumulation of retirement savings, they do not require onerous prudential supervision as members should be able to protect their own interests.
7.106 The emphasis on responsibility and self protection in the regulation of SMSFs was reiterated by the Panel which identified the following policy principles underpinning regulation in this sector:
Principle 1—Ultimate responsibility
Principle 2—Freedom from intervention
Principle 3—… but not complete absence of intervention.
7.107 A regulatory framework that relies on self protection may be problematic, however, as a larger number of SMSFs come under the control of older people who may require increasing decision-making support.
What happens when a trustee suffers a ‘legal disability’?
Enduring attorney to take over SMSF
7.108 In the event that a trustee/director suffers a ‘legal disability’ (the term used in the SIS Act for a lack of decision-making ability), the SMSF will become non-compliant for the purposes of superannuation law six months after legal disability unless: the principal’s interest in the fund can be paid out; the fund is able to be wound up, a tribunal appoints a financial administrator who can step in as trustee/director; or the management of the SMSF is transferred to an APRA licensed trustee. If the fund becomes non-compliant for the purposes of superannuation law there may be a range of administrative and tax penalties that apply and the fund may be wound up.
7.109 The only exception is where the trustees/directors have appointed an enduring attorney, as the SIS Act permits an attorney to become a trustee or director of the corporate trustee for the purposes of the fund’s compliance with superannuation law. Accordingly, in order to manage the situation where a trustee/director suffers a ‘legal disability’, it is essential that all trustees/directors have an enduring power of attorney.
7.110 Importantly, the law only permits an enduring attorney to become a trustee/director. The law does not require the attorney to become the trustee nor does superannuation law override the particular terms of the trust deed and/or constitution of the corporate trustee. The trust deed and constitution of the corporate trustee must allow for the appointment of the attorney as trustee and the processes set down in the document must be followed.
7.111 With respect to the situation where a person has a legal disability and their enduring attorney seeks to become the trustee or director of the corporate trustee, the ALRC notes that, aside from sophisticated investors and their professional advisers, there appears to be a general lack of awareness of the complexity that surrounds the process of appointing the enduring attorney as a director/trustee of an SMSF.
7.112 The process for an enduring attorney to take control of the SMSF on the principal’s loss of capacity is not straightforward, particularly when compared to dealing with bank accounts. In those latter cases, the attorney must simply present the enduring power of attorney document in order to complete transactions from the bank account.
Process of appointing enduring attorney as an individual trustee
7.113 A particular complication arises with respect to SMSFs with individual trustees, as there must be a minimum of two trustees and there are particular rules of general trust law that inhibit the ability of the remaining trustee continuing to act where one trustee has a legal disability. Unless the trust deed specifically provides to the contrary, individual trustees must act jointly; and the trustee with a legal disability continues to be a trustee until removed. Accordingly, where one trustee suffers a legal disability the other trustee (or trustees) cannot make any decisions on behalf of (and in the absence of) the person who has suffered a legal disability.
7.114 Therefore the key issue is how the trustee who has a legal disability may be removed and the enduring attorney be appointed. This is determined by the trust deed. Some of the most common methods included in trust deeds are for the power to be assigned to the outgoing trustee, the member(s) of the fund or, in older deeds, the ‘employer sponsor’ of the fund. Unless carefully drafted, the trust deed may give power for the removal and appointment to the remaining trustee or members of the SMSF, rather than the enduring attorney for the individual who has suffered a legal disability. Particular legislative provisions applying to trusts generally may also be invoked giving the last surviving trustee the power to nominate a replacement for the trustee who has lost capacity.
7.115 Thus a person (John) may appoint his daughter (Maria) as his enduring attorney and in that document specifically give Maria power to manage John’s superannuation. Notwithstanding this, if John suffers a legal disability that invokes the enduring power of attorney, Maria will not automatically become the trustee of the SMSF. The terms of the trust deed must be followed. The terms of the SMSF trust deed may give that power to the other individual trustee, John’s brother Joshua. Thus Joshua has the power to appoint the successor trustee and he may use this to appoint someone other than the principal’s daughter and enduring attorney. If Joshua did this, the SMSF will ultimately become non-compliant for the purpose of superannuation law, but the immediate concern—from an elder abuse perspective—is that John’s investment in the SMSF will be under the control of someone other than the person he wished to take control of his finances in the event that he suffered a legal disability. This increases the risk that those funds will not be managed in a manner that upholds John’s wishes.
7.116 This type of scenario was reflected in the submission from the Financial Planning Association of Australia:
The most common SMSF dispute when an individual member has died or lost capacity, involves the spouse of a second marriage trying to disinherit children from the first marriage, particularly where the spouse of the second marriage is a trustee and has discretion of the fund.
7.117 The other complication with an individual trustee is that John’s name will be on all the legal documents for all the real property and other assets of the SMSF. If Maria is successful in becoming the trustee, all the documentation will need to be changed from John’s to Maria’s name. Chartered Accountants Australia and New Zealand explained some of the practical challenges of effecting a change in trustee:
[the process] can be expensive, time consuming and deeply frustrating. Depending on the assets held by an SMSF the following fees may apply for changing the ownership of fund assets:
State or Territory filing fees for changing land titles.
Fees, chargers or penalties imposed by financial institutions such as, banks, stock brokers and share registries.
Amending lease documents.
In addition the administrative process and documentary proofs require to change the owner of a trust asset … will vary greatly from one entity to another.
Process of appointing enduring attorney as a director of the corporate trustee
7.118 Where the SMSF has a corporate trustee, the process of appointing the enduring attorney as a director is somewhat easier. There is no need to change the trustee of the SMSF, but rather there is a need to change a director of the trustee. Standard off-the-shelf corporate constitutions typically (but not in every case) have provisions that provide for automatic vacation of the position of director on the loss of capacity or legal disability. Members holding a majority of shares at a general meeting of shareholders are required to appoint a new director. The enduring attorney may have the authority over the shares held by the director who has suffered a legal disability to vote those shares to appoint themselves a director.
7.119 Using the same example as in paragraph [7.115], but assuming a corporate trustee, John may appoint his daughter Maria as his enduring attorney and in that document specifically give Maria power to manage John’s superannuation. John and Joshua are both directors of the SMSF’s corporate trustee and each hold one share in the corporate trustee. Thus if John suffered a legal disability, Maria would require the votes of Joshua in a general meeting of shareholders to be appointed as a director (as both Maria and Joshua would control 50% and not a majority of shares). If Joshua did not vote for Maria to become a director, she would not become a director of the trustee. If this were to occur, the SMSF will again ultimately become non-compliant for the purpose of superannuation law, but the immediate concern—from an elder abuse perspective—is that John’s investment in the SMSF will be under the control of someone other than the person he wished to take control of his finances in the event that he suffered a legal disability.
Consequences of a trustee suffering a legal disability
7.120 There are two important points from the previous discussion. First, the legal documentation for the SMSF must be drafted in a way that reflects the succession plans of the members on suffering a legal disability. Many of the documents used to establish an SMSF do not properly provide for succession events where a trustee suffers a legal disability. The adequacy and currency of SMSF trust deeds is currently not scrutinised at all, either by the ATO, or the approved auditor.
7.121 Secondly, careful consideration is needed as to who is likely to have effective control of the SMSF in circumstances where a trustee suffers a legal disability. This is because the person who has control has a significant influence over whether the person’s wishes for the management of their SMSF are carried out in the event of suffering a legal disability.
Superannuation Legislation Amendment Act (No. 3) 1999 (Cth). SMSF were previously known as excluded funds.
The only exception is single member funds with individual trustees where there must be two trustees one of whom is the member. See Superannuation Industry (Supervision) Act 1993 (Cth) s 17A.
Australian Taxation Office, Annual SMSF Population Analysis Tables (2016).
Australian Prudential Regulation Authority (APRA), Statistics: Quarterly Superannuation Performance June 2016 (2016).
Australian Taxation Office, above n 103.
Julie Castillo, ‘The SMSFs Trustee-Members’ (2012) 40(3) Australian Business Law Review 177, 178.
Financial Planning Association of Australia (FPA), Submission 295.
Super System Review Panel, Super System Review Final Report (2010).
Office of the Public Guardian (Qld), Submission 173; Financial Services Institute of Australasia, Submission 137.
Dixon Advisory, Submission 342.
Australian Taxation Office, above n 103.
Explanatory Memorandum, Superannuation Legislation Amendment Act (No. 3) 1999 (Cth).
Australian National Audit Office, The Australian Taxation Office’s Approach to Regulating and Registering Self Managed Superannuation Funds (Report No 52 of 2006–2007, 2007).
Super System Review Panel, above n 110, 219.
Superannuation Industry (Supervision) Act 1993 (Cth) s 17A.
As set out in ch 5, given the complexity of managing a SMSFs, the ALRC is recommending that the enduring power of attorney must explicitly include a power to deal with superannuation.
Australian Tax Office, Self-Managed Superannuation Funds Ruling, SMSFR 2010/2, 21 April 2010 2.
Muir v Inland Revenue Commissioners  1 WLR 1269, 1283. For an excellent summary of the law in this area as it relates to SMSFs see: Bryce Figot, Complete Guide to SMSFs: Planning for Loss of Capacity and Death (CCH Australia, 2016).
In the Estate of William Just deceased (No 1) (1973) 7 SASR 508 and Beath v Kousal  VSC 24.
Figot, above n 121, 49–52.
Where the terms of the trust deed are silent or the provisions cannot be invoked (because the outgoing trustee has lost capacity and therefore can’t elect a replacement trustee) See, eg, Trustee Act 1925 (NSW), s 6; Trusts Act 1973 (Qld) s 12 and Trustee Act 1958 (Vic) s 41.
Financial Planning Association of Australia (FPA), Submission 295.
Chartered Accountants Australia and New Zealand, Submission 368.
Corporations Act 2001 (Cth) s 141.
Grant Abbott, Guide to Self Managed Super Funds (CCH, 3rd ed, 2006) 87.