Using existing companies as SMSF trustees too risky
SMSF trustees looking to save money by having their existing company act as trustee for their fund should be warned that there are additional risks involved in this approach, according to a leading SMSF law firm.
In a recent blog post, Townsends Business and Corporate Lawyers’ Jim Townsend said while trustees occasionally wanted to use an existing company as their SMSF trustee, the efficiency benefits of doing this did not outweigh the risks.
“Despite the perceived benefits of appointing an existing company as corporate trustee – such as expense mitigation – the pros do not outweigh the cons,” Mr Townsend said.
“Non-specialised companies lack exclusivity in their motivations, may fail to meet the specific criteria required of directors of corporate trustees, and may make the SMSF vulnerable to the company’s creditors if the ownership/trusteeship of certain assets is ambiguous.”
Mr Townsend added that creating a new company with the sole purpose of being an SMSF’s trustee was a more compliance-friendly option.
“Repurposing an existing company to save a modest sum of money and a bit of paperwork isn’t worth the security compromise,” he said.
“Corporate trustees benefit when they are highly specific, because they are purpose-built.”
Mr Townsend pointed out that the costs involved in running an additional company for an SMSF were not much more, given the affordable registration fees.
“ASIC’s annual review fee for a proprietary company is $267, but for a special purpose company it’s only $54,” he said.
“To be compliant, the special purpose company must have its role as a trustee as its sole purpose and function. Further, the company’s constitution must prevent it from distributing income or property to its members.”