“There are over 600,000 SMSFs in Australia, managing over $800 billion in assets which underscores the significance of prudent trustee selection,” Mr Zawahir said.

“And while it’s common practice to have a trading company acting as the trustee of an SMSF, it can be fraught with potential pitfalls.”

Mr Zawahir said one of the biggest concerns in using a trading company as a trustee for an SMSF is the risk of asset entanglement as the distinction between business and superannuation assets can become blurred.

“This lack of clarity can lead to inadequate asset management and difficulties in clearly identifying the SMSF's holdings which can complicate the fund's administration and jeopardise the financial security of its members,” he said.

Another issue that needs to be considered is the intertwining of roles which can raise significant legal liabilities as in the event of legal action against the trading company, SMSF assets could become vulnerable to creditor claims.

“Directors who serve dual roles in both the trading company and the SMSF are often caught in a web of conflicting interests which can lead to inadvertent breaches of superannuation laws, putting the fund's compliance status at risk,” Mr Zahawir said.

Section 52B(2) of the Superannuation Industry (Supervision) Act 1993 highlights the risks associated with trading companies acting as SMSF trustees in stating that trustees must “act with honesty and diligence, prioritizing beneficiaries' financial interests”, and crucially, to keep SMSF assets distinct from personal or company assets.

Mr Zahawir said the overlap inherent in a trading company acting as a trustee could potentially breach these covenants, especially in maintaining the required separation of assets and avoiding conflicts of interest.

“The ATO ruling SMSFR 2008/2 further highlights the critical importance of the sole-purpose test for SMSFs, clarifying that SMSF trustees must focus solely on providing retirement benefits to members,” he said.

“This ruling is particularly pertinent for SMSFs with a trading company as a trustee, as it raises questions about the company’s ability to maintain the fund’s exclusive retirement focus.”

A special purpose corporate trustee has several advantages over a trading company trustee, Mr Zahawir said.

Firstly, there is continuity and stability with this choice as a corporate trustee offers perpetual existence, providing a stable and enduring governance structure for the SMSF, which is essential for the long-term management and succession planning of the fund.

“A corporate trustee structure also allows for greater flexibility in the fund's operations, including the ability to efficiently manage pensions and lump-sum payments, which is key for effective estate planning while maintaining the SMSF's concessional taxation status,” he said.

It also offers simplified administration and reduces administrative burden and associated costs.

“With a corporate trustee, the liability in legal matters is limited, offering a protective layer to individual members against personal legal risks which is particularly important when SMSF assets, such as property, are involved in litigation,” he said.

Furthermore, although there may be initial setup costs, a special purpose corporate trustee is generally more cost-effective over time, with lower ongoing fees compared to other entities.