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.”
This is only the tip of the iceberg. Several situations I have encountered over recent years include one where a multi-use company was changed to a trustee only role, the name of the company changed, then a new company started with the old name. That left some asset appearing to be held in the name of the new company. This indicates the most important detail on every document is not just the company name, but having the ACN included. A second was where a corporate trustee was changed, but the new corporate trustee had difficulties having things like share registries changed. While declaration Deeds may be prepared to evidence the trustee ownership, the recording of change of trustees in share registries must be made workable. It may be easy to say whet needs to be done in the future, but we all have years of issues yet to be rectified.