Company constitutions and SMSFs
While
setting up an SMSF, one of the decisions to be taken is regarding the selection
of trustees. You need to decide whether individual trustees should be appointed
or corporate trustees. While you might have heard that corporate trustees are
beneficial against individual trustees, you might wonder, why? Apart from
answering this question, this article also considers why the constitution of a
corporate trustee is important and what should be included in an SMSF constitution.
Why
opt corporate trustee over individual trustee?
There
are many reasons why a corporate trustee is preferable to individual
trustees for an SMSF.
Here
are some benefits that a corporate trustee has over individuals:
- Succession planning becomes more convenient when corporate trustee
is there. Further, the SMSF is able to meet the trustee/member rules
easily;
- Fund has to deal with less administration and paperwork in case
there is a change in members of the fund. The corporate trustee continues
to be the trustee even if a new member comes in or leaves the fund;
- There is more degree of asset protection. If any fine is imposed to
the SMSF, then the corporate trustee will bear the same. Also, since a
company has limited liability, the directors don’t become personally
liable in case company’s asset fall short;
- In a case where there are members oversees, it becomes easier to
manage such overseas members and deal with SMSF residency issues;
and
- You SMSF attracts comparatively lower administrative penalties
under SMSF laws.
Another
important aspect of a corporate trustee is that the company should be a sole
purpose company. This means that it should act in that role only as the trustee
of an SMSF.
Why
is a constitution important?
The
constitution is the key foundation document for any company. This document
regulates the activities of the trustee company along with the following:
- who has the power to appoint and remove directors;
- who can be appointed or removed as a director;
- Manner in which decisions are made by the company including how
meetings are conducted or resolutions are passed; and
- what powers the shareholders and directors have.
Where an SMSF has individual trustees, most of such issues are dealt as per the governing rules of the fund. However, where a corporate trustee is there, the constitution of the company regulates these issues.
While a company has an indefinite lifespan, there can be many developments that might make a constitution outdated. You should review each constitution at least every ten years. However, some legal or other changes might make it necessary to review the constitution more frequently.
In case you are curious to understand how constitution should be prepared, here are some key points to consider that should be covered in the constitution of a corporate trustee.
Nomination
of successor director
A
well drafted constitution can ensure that the right person is in control of the
company at the right time. When a director dies or loses capacity, they no
longer remain the director of the company. In such events, it becomes difficult
to appoint a replacement director. That’s why proper pre-planning is
required to manage such issues to ensure that the trustee/member rules are
satisfied and that any formalities regarding death benefits are met.
Some
people believe that a person’s legal representative or an executor can take up
the role of director of a corporate trustee upon their death or loss of
capacity. However, this is not true! Without any clause in constitution,
the decision to appoint a replacement director requires the shareholders’
approval.
To
tackle such situations, constitution should contain a clause to allow a
director to appoint a person to act as a director in the event of such nominating
director’s death or loss of capacity. Doing so allows the successor director to
take up the responsibility of directorship immediately when the nominating
directors dies or lose capacity. This provides greater certainty regarding the
ongoing control and management of the superfund.
Issue
of guardian share
Issue
of guardian share in the company can be useful for an SMSF to ensure that a
person can exercise ultimate control of a company and resolve disputed issues.
For example, a constitution can mention that a ‘Guardian Shareholder’ must
agree to any decision taken by both directors and shareholders before any
resolution is passed.
Flexible
constitution for lower ASIC fees
A
company that solely acts as an SMSF trustee gets to pay reduced annual ASIC
fee. It is important that a constitution has flexible wording that allows the
company to take on another role also without letting go the reduced fee
entitlement. Example, a constitution might allow the company to become the
trustee of a family discretionary trust, without requiring any change to the
constitution. Some constitutions are strictly written and a variation is to be
made if the company takes some another role. In contrast, others have flexible
wording that allows other roles to be taken on without any need to amend the
constitution.
Use
of company in SMSF investment structures
Another
benefit of a corporate trustee is that a company can be used as part of an
investment structure or entity that an SMSF invests in.
Consider
a situation where a company acts as the trustee of a unit trust whose
units an SMSF acquires. When the constitution of the corporate trustee of
the unit trust and the deed of the unit trust are properly drafted, then it is
possible for an SMSF to become a 50% investor in a unit trust along with an
‘unrelated’ party. Doing so doesn’t attract any in-house assets issues. It
should also be made sure that the constitution does not allow any one party to
‘sufficiently influence’ or ‘control’ the company/trust.
Lesser
formalities and usage of technology
Sometimes
some constitutions are such old or poorly drafted that it takes few formalities
to be complied with even for performing basic functions. For example, a
constitution might require that any written notice should be sent by post only.
A constitution should be flexible enough to allow the use of technology and
should place less formalities.
Conclusions
A well drafted company constitution gives opportunity for proper succession planning in an SMSF by providing greater certainty in the event of the death or loss of capacity of a key person. In contrast, poorly drafted constitutions can create a path for many risks and other consequences including costly legal disputes.
For an appointment to conduct your SMSF audit or to ask any questions
regarding your SMSF, please feel free to contact us. Auditax Accountants has friendly
highly-qualified tax professionals who would be happy to discuss your questions
with you. (No obligation, no strings attached.)
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