Why a Trading Company Should Not Act as Trustee of Your SMSF

Establishing a Self-Managed Superannuation Fund (SMSF) is a significant step in taking control of your retirement planning. One of the most critical structural decisions is the appointment of the fund’s trustee. While it may appear cost-effective or administratively convenient to nominate an existing trading company as the corporate trustee, this approach is fraught with legal, compliance, and operational risks. Below, we explore the key reasons why this structure is inadvisable and outline the appropriate course of action for rectifying it.

1. Regulatory Compliance Risks

Under the Superannuation Industry (Supervision) Act 1993 (SIS Act), all directors of a corporate trustee must also be members of the SMSF. Trading companies, by their nature, often appoint directors for commercial purposes who may not be members of the fund. This creates an immediate compliance breach.

Example: A family business appoints an external director to support growth. If this director is not a member of the SMSF, the fund is in breach of the SIS Act, potentially triggering regulatory penalties or disqualification of the trustee.

Best Practice: Establish a dedicated special purpose company to act solely as the SMSF trustee, ensuring all directors are fund members and compliance is maintained.

2. Asset Separation and Legal Clarity

SMSF assets must be held separately from personal and business assets. When a trading company acts as trustee, the distinction between fund and business assets can become blurred, particularly in legal documentation and financial reporting.

Example: A trading company holds both SMSF-owned property and business equipment. During an audit, the ATO questions asset ownership due to shared bank accounts and unclear titling, placing the fund at risk of non-compliance.

Best Practice: A standalone trustee company ensures that SMSF assets are clearly identifiable and legally distinct, simplifying audits and reducing exposure to legal disputes.

3. Exposure to Commercial Liabilities

A trading company is inherently exposed to commercial risks—such as litigation, insolvency, and creditor claims. If such a company also acts as SMSF trustee, the fund’s assets may be drawn into unrelated legal or financial disputes.

Example: A business faces a lawsuit for breach of contract. The plaintiff seeks damages from the company, including SMSF assets held under the same entity, jeopardising members’ retirement savings.

Best Practice: A special purpose trustee company ring-fences SMSF assets from business liabilities, preserving the integrity and security of the fund.

4. Administrative Complexity and Succession Planning

Changes in the trading company’s directorship or ownership—common in commercial operations—can inadvertently affect the SMSF’s trustee structure, leading to compliance issues and complicating succession planning.

Example: A director retires from the business but remains a member of the SMSF. The company updates ASIC records but fails to reflect this change in the SMSF documentation, resulting in a governance gap.

Best Practice: A dedicated trustee company provides administrative simplicity and ensures continuity in fund governance, particularly during estate planning or member transitions.

5. Loss of ASIC Fee Concessions

ASIC offers reduced annual fees for special purpose companies established solely to act as SMSF trustees. Trading companies do not qualify for this concession, resulting in higher ongoing costs.

Example: Over a 20-year period, the difference in ASIC fees between a trading company and a special purpose company can exceed \$4,000—an unnecessary cost burden on the fund.

Best Practice: Register a special purpose company to benefit from long-term cost efficiencies and regulatory concessions.

What to Do If Your SMSF Has a Trading Company as Trustee

If your SMSF currently uses a trading company as its trustee, it is advisable to restructure the fund to ensure compliance and asset protection. The process involves:

Recommended Remediation Steps

1. Incorporate a Special Purpose Company

   • Register a new company with ASIC, specifying its sole function as acting as SMSF trustee.

2. Update the SMSF Trust Deed

   • Amend the deed to reflect the appointment of the new trustee.

3. Transfer Legal Ownership of Fund Assets

   • Update asset titles, bank accounts, and investment holdings to reflect the new trustee.

4. Notify Regulatory Authorities

   • Inform the ATO and update the Australian Business Register (ABR) with the new trustee details.

5. Maintain Comprehensive Documentation

   • Record all trustee changes, including meeting minutes and updated trust deeds, to ensure audit readiness.

6. Seek Professional Guidance

   • Engage an SMSF specialist or legal adviser to oversee the transition and ensure full compliance.

Conclusion

While using a trading company as an SMSF trustee may seem expedient, it introduces significant risks that can compromise the fund’s compliance, asset protection, and long-term viability. The preferred structure is a special purpose corporate trustee, which offers regulatory clarity, administrative simplicity, and enhanced asset security.

If you are currently operating under a suboptimal structure, it is not too late to correct course. With the right professional support, transitioning to a compliant and robust trustee arrangement can be a straightforward and highly beneficial process.