While setting up an SMSF, one of the decisions to be taken is regardingthe 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?  

Thereare many reasons why a corporate trustee is preferable to individual
trustees for an SMSF.  

Hereare 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.  
• Anotherimportant 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.  

Whyis a constitution important? 

Theconstitution 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.  

Wherean 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.  

Whilea 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.  

Incase 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.  

Nominationof successor director 

Awell 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.  

Somepeople 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.  

Totackle 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.  

Issueof guardian share 

Issueof 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.  

Flexibleconstitution for lower ASIC fees 

Acompany 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.  

Useof company in SMSF investment structures 

Anotherbenefit of a corporate trustee is that a company can be used as part of an
investment structure or entity that an SMSF invests in.  

Considera 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.  

Lesserformalities and usage of technology 

Sometimessome 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 

Awell 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.  

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