Indicators of capacity appear in Burke’s case  QB 424. (The United Kingdom Mental Capacity Act 2005 has relied on Burke’s case regarding capacity.)
|Understand information||Do they understand key terms? Do they understand the nature and effect of any important documents? Are they able to engage in discussion with you about the information you are providing, about the advantages and disadvantages, about the options?|
|Retain information||Can they remember all the recent personal, family, and financial matters that are relevant to this decision? Is their rationale for their decision consistent or stable over time?|
|Believe information||Do they seem to believe or accept the information you have given them, such as the value of assets, options, advantages and disadvantages and possible outcomes? Are they making decisions on the basis of potentially paranoid ideas or false information?|
|Evaluate, process and weigh up information||Can they demonstrate to you that they have spent some amount of time considering their options or thinking about their decision? Do they seem to be listening and taking time to process new information you are providing them? Does their decision-making seem impulsive, flippant, poorly considered, or easily influenced by you?|
|Communicate information||Can your client explain in their own words what you have told them? (Rather than just saying ‘yes’ or ‘no’ to your questions.) Do their explanations include important and relevant information? Do they ask questions? Have they shown that they are thinking about how your advice applies to them and their personal and financial situation?|
The test of capacity needs to be particular to the situation, that is, it is decision- and time-specific. Does your client have the capacity to understand, retain, weigh up and communicate information in relation to the particular matter?
Loss of capacity may be a gradual or partial process with people tending to be neither ‘totally incapable’ nor ‘totally capable’ (see discussion in PVLRC 2010, p. 13). Whether the client has the required level of capacity will depend on a number of factors, including the type of legal transaction. Different legal tests are applied.
1. Testamentary capacity
The will maker must be of sound mind, memory and understanding when giving instructions for the will and when executing the will. (See Legal Services Commissioner v Ford  QLPT 12 (22 Aug 2008) where a solicitor was found guilty of unsatisfactory professional conduct in preparing a new will and an enduring power of attorney for an elderly client.) The will maker must know what he or she is doing and must understand the effect of the will, including the effect of its principal clauses; he or she must have a general knowledge of the nature of the property and its value; and must know which people might have a legitimate claim upon it. (See Nicholson v Knaggs  VSC 64 at 100.)
2. A donor making an enduring power of attorney (financial)
S. 118 Instruments Act 1958 sets out the test for capacity. The donor needs to understand the ‘nature and effect of the enduring power of attorney’, which includes understanding matters as set out in s. 118(2) Instruments Act 1958.
Witnesses to an enduring power of attorney are required to attest that ‘at the time, the donor appeared to the witness to have the capacity necessary to make the enduring power of attorney.’ The witness must also attest that ‘the donor signed the enduring power of attorney freely and voluntarily in the presence of a witness.’ (s. 125A Instruments Act 1958).
3. Capacity to enter into an agreement
In Gibbons v Wright (1954) 91 CLR 423 at 437 (per Dixon CJ, Kitto and Taylor JJ), the High Court defined a decision-specific test for capacity to enter into a contract:
The law does not prescribe any fixed standard of sanity as requisite for the validity of all transactions. It requires, in relation to each particular matter or piece of business transacted, that each party shall have such soundness of mind as to be capable of understanding the general nature of what he [or she] is doing by his [or her] participation.
It is prudent to identify that the person is able to understand the nature of the contract, its purpose, its possible outcomes, and the risks, which may be many.