Special Purpose SMSF Company - compliant with 6 member SMSFs

Special Purpose Company for SMSF: Corporate Trustee

Sub-heading (H2): Why a Special Purpose Company is safer and cheaper for your Self-Managed Super Fund

While you can use human trustees for your Self-Managed Super Fund (SMSF), it is dangerous. If a human trustee goes bankrupt or dies, your superannuation assets are at risk.

Instead, the best practice is to use a Special Purpose Company as the trustee.

A Legal Consolidated Special Purpose Company is a specific type of proprietary limited company set up solely to act as the trustee of your SMSF. Because it has no other function, the ASIC annual review fee is significantly reduced.

Why build a Special Purpose Company with Legal Consolidated Barristers & Solicitors?

• Reduced ASIC Fees: We register it with ASIC specifically as a "Special Purpose Company" to secure the lower annual fee for life.

• Asset Protection: A corporate trustee provides limited liability, protecting your personal assets from SMSF litigation.

• Succession Planning: A company does not die. This creates a perpetual structure that makes handling death and incapacity far simpler than with human trustees.

• Law Firm Backing: We are a law firm, not a web form. We deal with ASIC on your behalf.

Which is better as trustee of your SMSF: company vs human

An SMSF Special Purpose Company has one exclusive role: to act as the trustee of your SMSF.

When I started practising in superannuation law in the 1980s, most SMSFs had just 'dad' as the trustee. In those days, you only needed one trustee. Now, all the members are trustees. Or all the members are directors of the SMSF corporate trustee. These days, most superannuation lawyers, accountants and financial planners recommend a company as trustee of your SMSF. This is because:

1. 1. 1. An SMSF company lives forever. This is better succession planning. If a member dies, you do not need to transfer land. The land just stays in the SMSF corporate trustee name. You update the directors only
      2. If Mum and Dad are the SMSF trustees, you can change them only by deed. (You change trustees via a Deed of Variation of your SMSF.) In contrast, changing a director is simpler and less expensive. It is free and easy to just change an SMSF company director. (Changing a director of the company does not change the trustee.)
      3. If 'mum' and 'dad' are the two individual trustees of the SMSF, there is a problem if one dies. An SMSF cannot have one human as a trustee. You need at least two humans. Act quickly when your spouse dies. Appoint another human as a trustee or replace everyone with an SMSF company. The last thing you want to worry about is getting your SMSF compliant when a loved one dies. Legal Consolidated's SMSF corporate trustees are compliant with just one director.
   

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1. Ease of SMSF audit

   You can't mix SMSF assets with your other assets. A dedicated SMSF special-purpose company has no other job. When 'mum' and 'dad' buy an asset for the SMSF, they may forget to add 'as trustee for the SMSF'. There is a breach. In contrast, if you buy an asset in the name of the SMSF special purpose company and forget to put 'atf SMSF', it is not a big issue.

2. Contrary to popular belief, an SMSF can go insolvent. Any structure, even a conservative super fund, may not be able to pay its debts as they fall due.  You can sue an SMSF. If you have an SMSF, you have an additional layer of protection. A corporate trustee director does not automatically go down with the sinking trustee SMSF company.
3. Banks require an SMSF to have an SMSF company as a trustee for borrowing money. (They also require the trustee of the Custodian Agreement to also be an SMSF company.)
4. The 'Central Management and Control' rules are easier to comply with if you travel overseas.
5. ATO penalties are less with an SMSF special purpose company. Human trustees are jointly and severally liable.
6. An SMSF corporate trustee (special purpose company) pays lower ASIC fees each year.
7. An SMSF special-purpose company won't have an ABN. It does not trade in its own right. Instead, the SMSF has the ABN.
8. An SMSF corporate trustee does not prepare accounts. It has no assets. Instead, the SMSF prepares accounts and pays tax.
9. Land tax. Land tax rates are progressive. The more land in any given entity, the higher the rate of local tax. 
10. One advantage of humans as trustees of an SMSF is that humans are free. An SMSF corporate trustee costs money to get. And then you have annual ASIC fees. You have the added ASIC expense of setting up the SMSF company. Human trustees are free.

Why is an SMSF corporate constitution important?

The SMSF company constitution is vital. The Constitution is the rules as to what the SMSF corporate trust does:

• Power to appoint and remove directors (who are also SMSF members)
• Decide on meetings and resolutions
• Shareholders' and directors' power

If you opt to just have Mum and Dad as the SMSF trustees, these issues are dealt with under the governing rules of the SMSF Fund Deed. But, when you have an SMSF corporate trustee, the constitution controls these issues.

When an SMSF company director dies

Anyone can own shares in the SMSF corporate trustee. There are no SMSF rules on this. But the shareholders of the SMSF corporate trustee are generally Mum and Dad. The members of the SMSF usually hold shares in the SMSF company. For:

• Mutual Wills - When Dad dies, everything goes to Mum. And once both mum and dad are dead, everything is to the children. That works if each other and the children are to get the super at your death. If not, rethink your Estate Planning.
• Single Will - You die. Whatever you own, such as shares in an SMSF company, go to your beneficiaries. If your beneficiaries are also getting your superannuation, then that works well. If not, you can update your Legal Consolidated Will for free.

There is up to 32% tax on super. This is calculated at the moment of your death.

Ensure the right people control the SMSF corporate trust shares. Especially upon your death. Your Constitution is vital for a smooth transition.

Consider a Binding Death Benefit Nomination - that never expires.

Q:  Must the SMSF trustee appoint a "legal personal representative" when a member dies? Or can the remaining trustee form a new company and make the new company the SMSF trustee?

The case of Ioppolo & Hursford v Conti [2015] WASCA 45 answers this question.

The answer is no.

Section 17A(3)(a) SISA Act 1993 allows the trustee of the SMSF to appoint the dead member's 'Legal Personal Representative' (LPR) as a trustee. (For a Will, this person is the executor.) But does the SMSF trustee have to do so? The court states that section 17A(3)(a) is ‘permissive'. It is not 'mandatory'. You do not have to do it.

In Ioppolo & Hursford v Conti, the trustees of the SMSF are two humans. One dies. Must the survivor appoint the dead member's Legal Personal Representative as co-trustee of the SMSF? 

• Q: Can the surviving SMSF trustee, instead, appoint a corporate trustee?

Yes.

• Q: Can the surviving SMSF be the sole director of that corporate trustee?

Yes.

• Q: How long does the SMSF Fund have to make the appointment of the new Special Purpose Company?

The appointment by the remaining member of an SMSF company trustee occurred within 6 months of the member’s death. The Court stated that the SMSF fund is still compliant. This is under the SIS Act rules.

• Q: Is the surviving member a bit cheeky, controlling the dead person's super with the new SMSF company trustee?

There is no lack of bona fides in the trustee’s decision. There is no 'bad faith'.

Sure, the deceased left a Will 'requesting' (a Will can not control superannuation) that her super goes to her children. But the court pointed out that the subsequent signing of a binding nomination (in favour of her husband) meant that her prior 'wishes' in her will were superseded.

Legal Consolidated holds the view that it would have been irrelevant whether the Will had been so 'superseded'. A Will has no control over the SMSF trustee. The SMSF trustee is at liberty to exercise that discretion. And the exercising of that discretion is usually a private matter.

When a director of an SMSF company dies

When a director dies or loses capacity, they cease to be a director of the SMSF company. Who replaces them? The (remaining) shareholders decide that. 

A Will controls your shares. But a Will has no control over the appointment of directors. (Only shareholders control who the next director is.)

Does an SMSF corporate trustee go out of date?

A company lives forever. But laws and fashion change. SMSF Company Constitutions go out of date.

While SMSF Deeds are upgraded every 5 - 6 years, an SMSF corporate trust is generally only updated every 12 years.

Also, update your SMSF corporate set of rules after a major change in legislation.

Upgrade SMSF Deed rules and change the Trustee - at the same time

Q: My old SMSF Deed is 6 years old. And needs a Deed upgrade to a Legal Consolidated SMSF Deed. Also, the SMSF trustees are currently individuals. Can I update the Trustee and the Deed both at the same time?

A: Yes, you can update the SMSF Deed and Trustee by this Deed of Variation to update the Deed and change the Trustees. It changes human trustees to your new company. And it upgrades your SMSF rules. Both at the same time.

(Do you only need to remove the human SMSF trustees? And put in your new company? Build this Deed of Variation to update the Trustee. However, even if your SMSF is new, you should take the opportunity to upgrade it to a Legal Consolidated SMSF Deed.)

Can a Special Purpose Company be used as the trustee of a Bare Trust or a Custodian Trust?

Q: I am confused about using companies for an SMSF.

• Can a Special Purpose Company be used as the Trustee for an SMSF?
• Can a Special Purpose Company be used as the Trustee for a Bare Trust if investing in property? (This is where the SMSF is borrowing money through an instalment warrant - limited recourse loan.)
• Can an SMSF trustee be a Special Purpose Company?

A: Remember that you only have a Special Purpose Company to save the ASIC annual fees. Otherwise, it has no purpose or value. 

But if you have a Special Purpose Company, then it can only be used as the trustee of a Self-Managed Super Fund. It can not do anything else. It cannot be the trustee of a Bare Trust or an SMSF Custodian Trust. It cannot be a trustee of a Custodian Trust. (This is where the SMSF is borrowing money through a limited recourse gearing strategy.) It cannot be the trustee of a Family Trust. The Special Purpose Company can have no assets (other than its share capital). A Special Purpose Company cannot trade in its own right. So, to answer your questions:

• Can a Special Purpose Company be used as the Trustee for an SMSF? Yes, of course. That is why you have a Special Purpose Company. It is the reason the company exists.
• Can a Special Purpose Company be used as the Trustee for a Bare Trust if investing in property? Of course not. A Special Purpose Company can only be the trustee of an SMSF. Its sole reason for being is to be the trustee of an SMSF. And if you are using the expression "Bare Trust" to refer to a "Custodian Trust", then the answer is still no. Legal Consolidated does not give advice on gearing your SMSF. But a Custodian Trust is not an SMSF.
• Can an SMSF trustee be a Special Purpose Company? Yes. Most trustees of an SMSF are a company. Most of those are Special Purpose Companies. But any Legal Consolidated Pty Ltd company can usually also be a trustee of an SMSF. A company does not have to be a Special Purpose Company. But most are to save on the annual ASIC fee.
• Can a Security Custodian company acting as a trustee for a Custodian (Bare) Trust be a Special Purpose Company? No, it can not. A Special Purpose Company can only be the trustee of an SMSF. A Custodian Trust is not an SMSF. A special type of bare trust holds geared property for an SMSF. It is a different beast doing a different job.

Six advantages of using Legal Consolidated for SMSFs corporate trustees:

1. 94% of special-purpose company incorporations happen within 14 minutes of you building the document online
2. As required, we meet with ASIC to confirm your SMSF company name
3. What if your SMSF company name is unavailable or challenged by ASIC? We will contact you and help you find one that is available
4. You receive a secure, personalised email containing:
   • our cover letter on law firm letterhead
   • Certificate of Incorporation of the SMSF special-purpose company
   • SMSF Company Constitution
   • All minutes
5. As always, our hints and training videos guide you. It is free to start the building process.
6. An SMSF company constitution is a deed. Only a law firm can legally prepare deeds.

Compliance Risks when an SMSF Trustee also acts as Trustee of a Family Trust

A company can wear many hats. For example, it can be a trustee of an SMSF. It can also be a trustee of a Family Trust. And it can wear a third hat by running a business in its own name. (If the company did more than be a trustee of an SMSF, it could not be a Special Purpose Company.)

Significant compliance risks arise when an SMSF trustee company also carries out additional jobs, such as running a business or being a trustee of a Family Trust:

• Distinguishing financial activities: How does the trustee company separate rents and expenses for SMSF properties from those managed for the family trust?

• Bank account segregation: Are there dedicated bank accounts for the trustee company, the SMSF, and the family trust? Or are all funds pooled into one account, which is illegal?

• Accuracy in record-keeping: Can the trustee directors ensure that all deposits and transactions are correctly recorded in the appropriate accounts?

• Sole purpose test risks: The SMSF sole purpose test under section 62 of the Superannuation Industry (Supervision) Act 1993 (SIS Act) requires SMSF members to receive benefits only upon retirement or in cases of incapacity. Even indirectly, directors who pay themselves fees through the trustee company may breach this test.

• Remuneration breaches: Section 17A(2)(d) of the SIS Act prohibits SMSF directors from receiving any remuneration for their services. A breach can disqualify the fund from being an SMSF, requiring it to register as a Registrable Superannuation Entity (RSE) under section 10(1) of the SIS Act. This transition is complex and costly, as only licensed trustees meeting stringent financial and training standards can act for an RSE.

Directors face penalties, including imprisonment, if these issues are not addressed.

To address any potential breaches, the trustee company should immediately resign as trustee of the SMF and establish a new special-purpose SMSF trustee company.

A company operating an SMSF should wear only one hat. It should only do that one job.