The selection of a Trustee is a critical decision in the realm of Self-Managed Superannuation Funds (SMSFs), with far-reaching implications for the fund's security, compliance, and overall management. Statistically, as per the latest data, there are over 600,000 SMSFs in Australia, managing over $800 billion in assets. This underscores the significance of prudent trustee selection. The common practice of a trading company acting as the Trustee of an SMSF, while seemingly convenient, is fraught with potential pitfalls that merit serious consideration.
Blurring of Lines between Business and Retirement Assets
A primary concern is the risk of asset entanglement. When a trading company doubles as an SMSF Trustee, the distinction between business and superannuation assets becomes blurred. This lack of clarity can lead to inadequate asset management and difficulties in clearly identifying the SMSF's holdings. Such a scenario not only complicates the fund's administration but also jeopardises the financial security of its members.
Legal Risks and Creditor Claims
The intertwining of roles also raises significant legal liabilities. In the event of legal action against the trading company, SMSF assets could become vulnerable to creditor claims. This exposure to external financial risks is a situation that typically wouldn't arise if the SMSF had a distinct, separate trustee.
Conflict of Interest and Regulatory Compliance
Moreover, directors who serve dual roles in both the trading company and the SMSF are often caught in a web of conflicting interests. This situation can lead to inadvertent breaches of superannuation laws, putting the fund's compliance status at risk.
In light of Section 52B(2) of the Superannuation Industry (Supervision) Act 1993, the risks associated with trading companies acting as SMSF trustees become even more pronounced. This legal provision mandates trustees to act with honesty and diligence, prioritizing beneficiaries' financial interests, and crucially, to keep SMSF assets distinct from personal or company assets. The overlap inherent in a trading company acting as a trustee could potentially breach these covenants, especially in maintaining the required separation of assets and in avoiding conflicts of interest.
The ATO ruling SMSFR 2008/2 further highlights the critical importance of the sole purpose test for SMSFs. It clarifies that SMSF trustees must focus solely on providing retirement benefits to members. This ruling is particularly pertinent for SMSFs with a trading company as a trustee, as it raises questions about the company’s ability to maintain the fund’s exclusive retirement focus. The potential for conflicting interests between the company's business activities and the SMSF's objectives could lead to non-compliance with this test, underscoring the need for a special purpose corporate trustee that can guarantee adherence to the sole purpose requirement.
The Case for a Special Purpose Corporate Trustee
Given the abovementioned risks, the alternative of establishing a special purpose corporate Trustee emerges as a more prudent and secure choice. The advantages of a special purpose corporate Trustee are manifold, as detailed below:
1. Continuity and Stability: Unlike individual Trustees, a corporate Trustee offers perpetual existence, providing a stable and enduring governance structure for the SMSF. This continuity is essential for the long-term management and succession planning of the fund.
2. Enhanced Operational Flexibility: A corporate Trustee structure allows for greater flexibility in the fund's operations, including the ability to efficiently manage pensions and lump-sum payments. This flexibility is key for effective estate planning while maintaining the SMSF's concessional taxation status.
3. Simplified Administration: Changing Trustees under individual Trusteeship can be cumbersome and costly. A corporate Trustee streamlines this process, as changes in directors do not equate to a change in the Trustee entity. This simplification reduces administrative burden and associated costs.
4. Legal and Litigation Protection: With a corporate Trustee, the liability in legal matters is limited, offering a protective layer to individual members against personal legal risks. This is particularly pertinent when SMSF assets, such as property, are involved in litigation.
5. Long-term Cost Effectiveness: Although there may be initial setup costs, a special purpose corporate Trustee is generally more cost-effective over time, with lower ongoing fees compared to other entities.
In conclusion, while a trading company acting as an SMSF Trustee might initially seem convenient, the associated risks and legal entanglements make this a less-than-ideal choice. On the other hand, a special purpose corporate Trustee offers a robust, flexible, and cost-effective solution, ensuring the long-term security and compliance of the SMSF. By opting for this dedicated Trustee structure, SMSF members can safeguard their retirement savings and achieve peace of mind.