If you're setting up a self-managed super fund (SMSF), you've probably heard the debate: individual trustees vs. corporate trustees. But what often gets missed is the value of appointing a special purpose company as your SMSF trustee.
Here's why it's worth considering, the potential benefits, cost savings, and when it's the right fit. I also delve into when an SMSF can't appoint a special purpose company as trustee. Hint: it has to do with SMSF loans.
Image: Susan O'Connor, Susan O'Connor Accounting principal and SMSF specialist
Why choose a company trustee for your SMSF?
Appointing a company as trustee of your SMSF, instead of an individual, human trustee, offers many advantages.
To focus on just one aspect: appointing and resigning new SMSF directors is easy under a corporate trustee structure, as long as the constitution is followed.
A company also allows for a sole director, while an SMSF operating under an individual structure must always have two trustees and, if one passes away, a new trustee must be appointed.
A corporate structure is always my preference and, if you've decided to appoint a company to act as your SMSF's trustee, you might consider a special purpose company.
What is a special purpose company?
As SMSF specialists, we often convert companies acting as the trustees of an SMSF to special purpose companies.
Why do we do this? The reasons are two-fold.
Firstly; to save on fees. These special purpose companies can't do anything other than act as trustee of a regulated superannuation fund. In recognition of this, ASIC offers substantially reduced annual review fees.
After the initial outlay to convert a company to a special purpose company, an SMSF will save hundreds of dollars each year on ASIC fees for the life of the company.
Secondly and more importantly; if the company is an older company ( established before 1995), then the memorandum and articles will state two directors are required. The new constitution for the special purpose company will only require one director, as is consistent with superannuation law.
A note on constitutions
It is important to note that all constitutions should be reviewed (even newer ones) as some still state two directors are required.
This is also why we source all our documents from a reputable law firm, as some documents offered by online providers are fraught with danger.
If your constitution states you require two directors and you only have one in place, you will be in breach of the Corporations Act 2001 even if you're otherwise following superannuation law, so it's very important to make sure your constitution is up to date.
When you can't appoint a special purpose company as trustee
When we take over SMSF clients, they sometimes have pty ltd companies acting as trustees, rather than a special purpose company.
This may be because the SMSF is an older fund. In such cases, it's important the client doesn't use the company for anything other than acting as the corporate trustee of their SMSF.
While we typically prefer to convert the company to a special purpose company, there is one instance in which this isn't possible.
When a limited recourse borrowing arrangement (LRBA) exists, a pty ltd company must be the trustee company for the bare trust - a special purpose company cannot perform this function.
What is an LRBA?
An LRBA is a type of loan that allows SMSFs to purchase assets, such as property, while protecting other fund assets from lender claims. It means that, if an SMSF defaults on its loan obligations, the lender can only repossess the security attached to the loan and can't go after any of the SMSF's other assets.
Susan O'Connor, founder of Susan O'Connor Accounting, is an expert in self-managed super funds (SMSFs). A Fellow of CPA Australia, Susan holds a Bachelor of Business, a Diploma of Financial Planning, is a Registered Tax Agent, and holds an Australian Financial Services Licence. She is passionate about teaching Australians about superannuation and inspiring them to get invested in their own retirement funds.
Considering using an SMSF loan to leverage your superannuation? Here are some of the most competitive available on the market right now:
| Lender | Home Loan | Interest Rate | Comparison Rate* | Monthly Repayment | Repayment type | Rate Type | Offset | Redraw | Ongoing Fees | Upfront Fees | Max LVR | Lump Sum Repayment | Additional Repayments | Split Loan Option | Tags | Features | Link | Compare | Promoted Product | Disclosure |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
6.99% p.a. | 7.01% p.a. | $3,323 | Principal & Interest | Variable | $null | $720 | 70% |
| Promoted | Disclosure | ||||||||||
7.19% p.a. | 7.74% p.a. | $3,391 | Principal & Interest | Variable | $395 | $1,185 | 70% |
| Disclosure | |||||||||||
7.19% p.a. | 7.65% p.a. | $3,391 | Principal & Interest | Variable | $395 | $1,254 | 70% | |||||||||||||
7.24% p.a. | 7.26% p.a. | $3,407 | Principal & Interest | Variable | $0 | $710 | 70% | Disclosure | ||||||||||||
7.75% p.a. | 7.83% p.a. | $3,582 | Principal & Interest | Variable | $0 | $995 | 80% | |||||||||||||
7.75% p.a. | 8.13% p.a. | $3,582 | Principal & Interest | Variable | $0 | $445 | 60% | |||||||||||||
8.19% p.a. | 9.11% p.a. | $3,735 | Principal & Interest | Variable | $395 | $1,185 | 65% |
| ||||||||||||
7.49% p.a. | 7.51% p.a. | $3,493 | Principal & Interest | Variable | $0 | $720 | 80% |
| Promoted | Disclosure |
Any information contained in this article is general information only and does not take into account your specific circumstances or objectives. Please speak to a licensed adviser or for specific SMSF advice contact us before acting on this information.
Image by bady abbas on Unsplash
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