Special Purpose SMSF Company – compliant with 6 member SMSFs

SMSF company (SMSF corporate trustee)

Special Purpose company complies with ASIC and Superannuation rules

SMSF company as corporate trustee for your Self-Managed Super Fund

Build an SMSF company that acts solely as the trustee of your Self-Managed Super Fund (SMSF). Allows for up to 6 members in your SMSF. Fully SIS Legislation compliant with Special Purpose Company rules.

The constitution prohibits distributing income and property to shareholders. It is ‘safer’ for your SMSF to have a Special Purpose company. You also save on ASIC’s annual charge.

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

When I started practising in superannuation law in the 1980s, the majority of 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 don’t need to transfer land. The land just stays in the SMSF corporate trustee name. You update the directors only
      2. If Mum and Dad at the SMSF trustees you can change them only via a 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 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 company you have another layer of protection. A corporate trustee director does not automatically go down with the sinking trustee SMSF company.
3. Banks require SMSF to have an SMSF company as 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 then the higher the rate of law 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.

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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 then 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 the 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 to the children. If each other and then the children are to get the super at your death then that works. 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 super then that works well. If not rethink your Estate Planning.

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 took place 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 dead person 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 are 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 as 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 constitutes go out of date.

While you upgrade SMSF Deeds every 5 – 6 years. You generally only update an SMSF corporate trust 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 Deed and change 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 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 to be trustee of a Bare Trust or Custodian Trust?

Q: I’m a bit 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.)
Can an SMSF trustee be a Special Purpose Company?

A: Remember the only reason you have a Special Purpose Company is 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 trustee of a Bare 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 trustee of a Family Trust. The Special Purpose Company can have no assets (other than its share capital). So, the Special Purpose Company can not 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. And most of those are Special Purpose Companies. But any 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 Custodian Trust is a special type of bare trust that 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 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.