Is your corporate trustee 'asset specific'?
It’s ‘horses for courses’ when choosing a corporate trustee for your SMSF. Jim Townsend elaborates.
One of the older items in my home today came out of a Christmas cracker some thirty years ago. Along with the terrible joke I probably reprinted in that month’s BLB, and a paper crown that didn’t fit what my wife assures me is my perfectly normal-sized head thank you very much, the cracker contained a set of three miniature screwdrivers. These little beauties are fantastic at tightening the screws on my glasses whenever a leg begins to wobble, and I’ve yet to find a better alternative.
In business, this is called “asset specificity.” Generally, it’s more apt to use this term regarding purpose-built assets, but for the purpose of the anecdote you can entertain the long bow I’ve drawn.
A measure of an asset’s specificity, as the term would imply, takes into account the breadth of the asset’s application. A screwdriver so tiny that it can only be used on your sunglasses? Highly specific. A spanner that has the little adjustable winding thingy in the middle of it so that the tool can be used on a variety of bolt sizes? Somewhat specific. Using duct tape to repair your glasses for that Harry Potter chic? Highly unspecific. You get the idea.
A self-managed super fund needs a corporate trustee specifically for that role: a “special purpose company”. Clients sometimes want to use an existing company as their SMSF trustee, but this lacks asset specificity. Despite the perceived benefits of appointing an existing company as corporate trustee - such as expense mitigation - the pros do not outweigh the cons.
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.
It’s much better to create a new company whose sole purpose for existing is to be the corporate trustee of the SMSF. This provides greater protection of the SMSF’s assets, as well as allowing for total compliance. If we consider the corporate trustee of an SMSF to be an asset – and we absolutely should – then what they’re really promoting is a high degree of ‘asset specificity’.
Repurposing an existing company, to save a modest sum of money and a bit of paperwork, isn’t worth the security compromise. Corporate trustees benefit when they are highly specific, because they are purpose-built. Their value as an asset is incomparable. Your dad’s plumbing company as corporate trustee? Less specific, less valuable, less capable of performing its duty to the necessary standard.
It’s pretty affordable, too. ASIC’s annual review fee for a proprietary company is $267, but for a special purpose company it’s only $54. To be compliant, the special purpose company must have its role as trustee as its sole purpose and function. Further, the company’s constitution must prohibit the company from distributing income or property to its members.
At SUPERCentral, we offer online tools that allow you to easily and quickly establish a new company as corporate trustee. We also provide more bespoke services should you need advice on specific circumstances.
Most importantly, check your crackers this Christmas. You never know when that paperclip, keyring or bottle opener may come in handy.