The constitutions of a company acting as the corporate trustee for SMSFs require close attention as they represent the main mechanisms that dictate how the decision-making process is performed for the fund, a specialist lawyer has said.
“In the context of an SMSF corporate trustee this is really important because it’s that constitution which will [determine] how decisions are made [by] the trustee,” DBA Lawyers lawyer Shaun Backhaus said as part of his firm’s latest podcast.
“If you didn’t have that constitution, you’d be looking to the SMSF [trust] deed and governing rules to determine how decisions [for the fund] are made.”
Further, Backhaus emphasised in situations where a corporate trustee has a constitution it would be very unlikely for the SMSF trust deed to have the power to usurp it.
DBA Lawyers director Daniel Butler pointed out it was not only important for a corporate trustee company constitution to exist, but also critical for it to contain terms that create consistency in the decision-making process.
To this end, Butler advised against having company constitutions for SMSFs where member balances dictated how much say an individual had in running the fund, particularly when the activities of the corporate trustee evolve.
“I’ve never been a fan of [these types of arrangements]. I actually think it’s quite inappropriate,” he said.
“Let’s look at it this way. Let’s say that a company takes on the role of a trading company or let’s say it takes on a role as a trustee of a family trust. Those decisions [affecting these companies will be] governed by the amount you have in the till, the account balance in the super fund, when the super fund really has no relevance to the family trust or the trading venture.”
In addition, he warned this type of constitution may lead to legal action if the director with the lowest super balance becomes dissatisfied as a result of getting constantly overruled in any decision-making situations.