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The case for having a special purpose corporate trustee for an SMSF

Q: Why is it recommended to appoint a special purpose corporate as the trustee of an SMSF?

A: Under section 19 of the Superannuation Industry (Supervision) (SIS) Act 1993 there are only two types of funds that may become regulated:

  • where the fund has a corporate trustee – using the constitutional power to make laws regarding corporations, or
  • if the fund has individuals acting as trustees, where the sole or primary purpose of the fund is to pay old age pensions – using the constitutional power to make laws regarding old age pensions.

When put into practice, these laws may become problematic. As an example, if a fund is established with individual trustees and the trust deed allows for the fund to pay members lump sum benefits on retirement, it may be putting its regulation status at risk as the primary purpose of the fund should be the payment of pensions and not lump sums. Therefore, for benefit payment flexibility, a corporate trustee allows the payment of a lump sum or pension.

An SMSF is a multigenerational vehicle. As such, trustees come and go over time. If the fund has individual trustees, this becomes an administrative nightmare. The Australian Taxation Office (ATO) specifically requires trustees to ensure they have all fund assets in the fund’s name. In doing this, the ATO stipulates the fund’s assets to be held in the names of all of the individuals as trustees of the fund. Therefore, where members and trustees come and go, all relevant asset registers need to be notified with each change. However, if the trustee was a corporate trustee, the corporate does not change, only the underlying directorship changes.

From a litigation point of view, individual trustees are jointly and severally liable in relation to a personal liability action in relation to one of the fund’s properties. The trustees may be able to recover from the assets of the fund subject to the fund’s governing rules and any superannuation laws preventing trustees from being financially accommodated for actions taken as a trustee. In circumstances where there is a corporate trustee, any action will be limited to the assets of the company, not those of the underlying directors.

One of the main arguments cited against using a corporate trustee is the cost issue. Considering some of the downsides as commented on above and the potential consequences that may arise, this argument does not hold a lot of merit. As mentioned, an SMSF is a multigenerational vehicle and, as such, certainty in terms of trusteeship is required. Also, the ongoing ASIC lodgement fee for a special purpose corporate is only $43 a year.

Once the decision is made to use a corporate trustee, the next step is to choose the type of corporate trustee. It has been common practice that a standard shelf company has been used as the trustee of an SMSF. Since the introduction of the director/member rules in section 17A of the SIS Act, the standard shelf company can prove dangerous. One of the main reasons is the voting power of the board. The trustee of the fund is empowered to make many and varied important decisions of the fund. Under a standard shelf company, directors are able to cast one vote each and, as such, the majority has power and control over the fund. However, this may not be appropriate in the case where there is a three-member/director SMSF with the member with the most significant benefits able to be outvoted on important decisions for the fund. This situation can also be exacerbated on the death or incapacity of a member.

In contrast, the voting power of the board of directors of a special purpose corporate is based on the account balance of each member. Unless agreed otherwise, in any meeting of the board of directors, a director holds the same number of votes as the account balance of the member they are representing. For example, in a three-member fund with Dad ($450,000 in benefits) and his two children (with $50,000 in benefits between them), at any board meeting Dad would have 450,000 votes and thus control of the fund.

Therefore, as illustrated above, it is essential on the establishment or review of an SMSF that the trustee structure is established properly. To not do so can be a very expensive and litigious position.A special purpose corporate trustee ticks all the relevant boxes and as such is the recommended trustee structure.

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