While setting up an SMSF, one of the decisions to be taken is regarding the selection of trustees. You need to decide whether individual trustees should be appointed or corporate trustees. While you might have heard that corporate trustees are beneficial against individual trustees, you might wonder, why? Apart from answering this question, this article also considers why the constitution of a corporate trustee is important and what should be included in an SMSF constitution.
Why opt corporate trustee over individual trustee?
There are many reasons why a corporate trustee is preferable to individual trustees for an SMSF.
Here are some benefits that a corporate trustee has over individuals:
- Succession planning becomes more convenient when corporate trustee is there. Further, the SMSF is able to meet the trustee/member rules easily;
- Fund has to deal with less administration and paperwork in case there is a change in members of the fund. The corporate trustee continues to be the trustee even if a new member comes in or leaves the fund;
- There is more degree of asset protection. If any fine is imposed to the SMSF, then the corporate trustee will bear the same. Also, since a company has limited liability, the directors don’t become personally liable in case company’s asset fall short;
- In a case where there are members oversees, it becomes easier to manage such overseas members and deal with SMSF residency issues; and
- You SMSF attracts comparatively lower administrative penalties under SMSF laws.
Another important aspect of a corporate trustee is that the company should be a sole purpose company. This means that it should act in that role only as the trustee of an SMSF.
Why is a constitution important?
The constitution is the key foundation document for any company. This document regulates the activities of the trustee company along with the following:
- who has the power to appoint and remove directors;
- who can be appointed or removed as a director;
- Manner in which decisions are made by the company including how meetings are conducted or resolutions are passed; and
- what powers the shareholders and directors have.
Where an SMSF has individual trustees, most of such issues are dealt as per the governing rules of the fund. However, where a corporate trustee is there, the constitution of the company regulates these issues.
While a company has an indefinite lifespan, there can be many developments that might make a constitution outdated. You should review each constitution at least every ten years. However, some legal or other changes might make it necessary to review the constitution more frequently.
In case you are curious to understand how constitution should be prepared, here are some key points to consider that should be covered in the constitution of a corporate trustee.
Nomination of successor director
A well drafted constitution can ensure that the right person is in control of the company at the right time. When a director dies or loses capacity, they no longer remain the director of the company. In such events, it becomes difficult to appoint a replacement director. That’s why proper pre-planning is required to manage such issues to ensure that the trustee/member rules are satisfied and that any formalities regarding death benefits are met.
Some people believe that a person’s legal representative or an executor can take up the role of director of a corporate trustee upon their death or loss of capacity. However, this is not true! Without any clause in constitution, the decision to appoint a replacement director requires the shareholders’ approval.
To tackle such situations, constitution should contain a clause to allow a director to appoint a person to act as a director in the event of such nominating director’s death or loss of capacity. Doing so allows the successor director to take up the responsibility of directorship immediately when the nominating directors dies or lose capacity. This provides greater certainty regarding the ongoing control and management of the superfund.
Issue of guardian share
Issue of guardian share in the company can be useful for an SMSF to ensure that a person can exercise ultimate control of a company and resolve disputed issues. For example, a constitution can mention that a ‘Guardian Shareholder’ must agree to any decision taken by both directors and shareholders before any resolution is passed.
Flexible constitution for lower ASIC fees
A company that solely acts as an SMSF trustee gets to pay reduced annual ASIC fee. It is important that a constitution has flexible wording that allows the company to take on another role also without letting go the reduced fee entitlement. Example, a constitution might allow the company to become the trustee of a family discretionary trust, without requiring any change to the constitution. Some constitutions are strictly written and a variation is to be made if the company takes some another role. In contrast, others have flexible wording that allows other roles to be taken on without any need to amend the constitution.
Use of company in SMSF investment structures
Another benefit of a corporate trustee is that a company can be used as part of an investment structure or entity that an SMSF invests in.
Consider a situation where a company acts as the trustee of a unit trust whose units an SMSF acquires. When the constitution of the corporate trustee of the unit trust and the deed of the unit trust are properly drafted, then it is possible for an SMSF to become a 50% investor in a unit trust along with an ‘unrelated’ party. Doing so doesn’t attract any in-house assets issues. It should also be made sure that the constitution does not allow any one party to ‘sufficiently influence’ or ‘control’ the company/trust.
Lesser formalities and usage of technology
Sometimes some constitutions are such old or poorly drafted that it takes few formalities to be complied with even for performing basic functions. For example, a constitution might require that any written notice should be sent by post only. A constitution should be flexible enough to allow the use of technology and should place less formalities.
A well drafted company constitution gives opportunity for proper succession planning in an SMSF by providing greater certainty in the event of the death or loss of capacity of a key person. In contrast, poorly drafted constitutions can create a path for many risks and other consequences including costly legal disputes.