The constitutions of companies acting as corporate trustees for SMSFs should avoid linking voting rights to member superannuation balances as this approach can introduce complexity and hinder equitable decision-making, a specialist lawyer has advised.
“We have reviewed [a constitution] recently, [where] the decision-making of the directors is weighted based on the market value of the account balances of their membership in the self-managed fund,” DBA Lawyers director Dan Butler explained during a briefing held by his firm last week.
“We would not recommend this and if you do have this style of constitution, we would recommend you consider if it’s wise, particularly if you have a low member balance. If you have a low member balance, you’re never going to hold sway at a director’s meeting.”
In addition to potential fairness concerns, Butler highlighted this voting mechanism often increases the administrative burden for SMSFs.
“It is complex, it is costly and it gives rise to unnecessary costs to establish the account balance before each director’s decision. Are you going to go out and get market valuations on all the assets to establish that this is the vote that is required for that constitution?” he said.
He also pointed out constitutions using this voting structure tend to be rigid, making it difficult to adapt if the corporate trustee’s role expands.
“What happens if that company takes on another role? It might take on the role as a trustee of a family trust,” he noted.
“In that event, what has the account balances in the super fund got to do with the family trust? We would recommend that if you have such a constitution, it be updated as soon as possible. We think those constitutions are not very appropriate.”
He further noted there were only limited scenarios where super balance-based voting may be useful, such as when a change of trustees is required.
“We do have in our super fund deed [where] calibration [of votes] is based on account balance for certain key decisions, such as a change of trustee,” he said.
“[For example], members with a higher account balance can then hire and fire the trustee, but that is sort of a one-off irregular decision. It’s not a common ongoing decision, such as a director’s decision who are operating the day-to-day activities of a company.”
