SMSF advisers and administrators should not be using an ordinary company in the establishment of a fund, according to an SMSF technical expert who has questioned the prevalence of their use among SMSFs with corporate trustees.
LightYear Group chief executive Grant Abbott said SMSFs should never use an ordinary company as the corporate trustee for an SMSF and the use of a special purpose company was defined under the Corporations Act 2001 and Australian Securities and Investments Commission guidelines.
Abbott noted that while the annual fee for a special purpose company was one-fifth of that for an ordinary company, at $54 compared to $267, under the Corporations (Review Fees) Regulations 2003 contained within the Corporations Act, the regulations also pointed to special companies as being of particular use for SMSFs.
He pointed out regulation three defined a special purpose company as one where “the constitution of the company prohibits distribution of the company’s income or property to its members”, as well as where “the sole purpose of the company is to act as the trustee of a regulated superannuation fund within the meaning of section 19 of the Superannuation Industry (Supervision) Act 1993”.
Abbott said this definition was picked up by ASIC in its guidelines around the use of a special purpose company, where the regulator stated “a superannuation trustee company acts solely as a trustee of a regulated superannuation fund. The company’s constitution must prohibit the company from distributing income or property to its members.”
The comments were made in an email to Abbott’s I Love SMSF newsletter database, where he stated he was prompted to examine the rules around company usage following a query on the issue from an SMSF administrator.
“That got me thinking – is this going on all over the place and is it a bad thing? I turned to the law and also the corporate regulator. That seems to me to be a good starting place rather than chatting with other lawyers or colleagues – the truth is in the law, not those who interpret it,” he said.
“Quite clearly the only shares that can be issued to shareholders are non-dividend-paying shares. If a company issues ordinary shares to shareholders, and claims that it is a special purpose company thereby breaching the regulations, ASIC can levy significant fines on the directors, and if done dishonestly, it can lead to criminal referrals and director disqualifications.”
He said corporate trustees who are currently using an ordinary company instead of a special purpose company can notify ASIC or update the company constitution and change the class of shares, adding “for the ultra-cautious I would suggest a deed of rectification and ratification by the directors of the trustee company”.
“Again it makes me wonder how many of the 300,000 or more SMSFs with company trustees are exposed under [the Corporations (Review Fees) Regulations 2003],” he said.