When you choose to establish a SMSF, you can either have a company or individuals appointed to act as the trustees of the fund. According to the ATO’s latest statistical report, approximately 77% of all SMSF’s have actively chosen individual trustees. Moreover, registrations of new SMSF’s with individual trustees in 2016 accounted for almost 93% of all new registrations. These numbers are concerning given the extensive benefits that running a corporate trustee presents. It seems most people adopt an individual trustee structure simply because of the cheaper initial cost. The establishment fee is higher where a corporate trustee is involved due to the need to establish and register the company with ASIC. A corporate trustee, however, should result in a considerable saving of money over the long-term. We will now take a look at some of the significant advantages of running a corporate trustee as opposed to running an SMSF with individual trustees.
Sole Members
If you are looking to establish a SMSF as a sole member, a corporate trustee structure allows you to be the sole director of the trustee company without having to rely on anyone else becoming involved. The laws governing self managed superannuation funds stipulate that with individual trustees, a sole member must have another person come on-board to act as the second trustee. If for example, there is a SMSF with a single member fund with two individual trustees and one dies, the fund cannot remain an SMSF with only one trustee and one member. In this case, someone new will need to be appointed as the second trustee and this can be an unnecessary burden.
Succession & Estate Planning
Since a company has an infinite lifespan, a company continues in the event of a member’s death. Consequently, there is more control of an SMSF and its assets in the event of the death or incapacity of a fund member. With individual trustees, the trustee relationship ceases upon death and timely action is required in order to ensure the aforementioned trustee/member rules are adhered to. The later structure can still work of course, however an appropriate succession plan must have been put in place to mitigate any contingencies. This is on top of the considerable paperwork that is usually associated with administering a person’s estate and obtaining probate of their will. A company offers greater flexibly for estate planning and avoids extra administrative work and costs at an inopportune time.
Asset Ownership
Admission/cessation of a fund member requires that same person either becomes or ceases being an individual trustee. The assets of the fund must be held in the name of the trustee(s). If the trustees change, so must all records pertaining to every asset held by the fund. For example, bank account names must be changed, every shareholding must be updated. If the fund owns property, the lands title office must be notified. the title to all assets to be transferred to the new trustees. This results in significant additional paperwork and is time consuming. State government authorities may charge a fee for title changes. On top of this cost, most financial institutions charge fees for amending the titles of the assets within the SMSF. With a corporate trustee, changes in membership will result in changes in the trustee company’s directorship however the trustee itself remains the same. Thus, the title to all assets remains unchanged removing any additional administration burden.
Asset Separation & Protection
As per SMSF regulations, fund assets must be recorded and kept separately from any assets which the members hold personally. With individual trustees, fund members risk intermingling fund assets with personal assets. Accordingly, having a sole purpose corporate trustee generally prevents this contravention from occurring because of the separation of entities, and because the trustee will not have any personal money (it will only have SMSF money). For this reason, a sole purpose corporate trustee can help to minimise inadvertent contraventions. For example, if an SMSF trustee is sued and a large debt results, individual trustees have their personal assets at stake if the SMSF assets are insufficient. In contrast, a corporate trustee is a separate legal entity, offering better protection.
Administrative Penalties
The SMSF administrative penalties rules allow the ATO to impose administrative penalties on SMSF trustees for the contravention of certain superannuation rules. Directors of corporate trustees are jointly and severally liable to the penalty. Individual trustees are liable to one penalty each. Consequently, having a corporate trustee instead of individuals can mean fewer ‘heads on the chopping block’ for penalties. If super laws are breached, administrative penalties are levied on each trustee whereas typically only applies to a company once for each contravention. For example, for failing to prepare financial accounts and statements, each trustee would be liable for a $1,800 penalty which would amount to $7,200 if there were four trustees (four times the amount a fund with a corporate trustee would incur).
Overseas Members
It is easier to evidence that the central management and control (‘CMC’) of a corporate trustee remains in Australia. An SMSF with individual trustees would generally have greater difficulty showing its CMC remained in Australia hence extra risk if members reside overseas or plan to in the future.
Lump sums and pensions
Individual trustees are regulated under the pensions power within Australia’s Constitution, while a corporate trustee is subject to the Corporations Act 2001. The main implication of this distinction is that a SMSF with a corporate trustee can pay benefits as a lump sum or as an income stream. A SMSF with individual trustees must state in its trust deed that the fund is established for the sole or primary purpose of providing old-age pensions (which are private retirement income streams rather than the government-supplied Age Pension). A fund with individual trustees can still pay benefits as a lump sum, however, the deed must have a specific clause allowing such payments.
Limited Recourse Borrowing Arrangements
If an SMSF with individual trustees tries to engage in a limited recourse borrowing arrangement, the bank will usually insist on a corporate trustee. Often ‘time is of the essence’ in relation to applying for finance, so having to establish a company, retire the current trustees and appoint the company will most likely lengthen the time it takes to gain approval.
Conclusion
While it is possible that some SMSF members may initially be put off by the cost of establishing and running a company, the numerous advantages discussed in this article of having a corporate SMSF trustee should persuade many to make the change. At H&R Block SMSF Solutions, we recommend corporate trustees as the better and more efficient option.
The content above has been prepared by H&R Block Ltd (“H&R Block”), ABN 89064268 800.The above information is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice. Although every effort has been made to verify the accuracy of the information contained above, H&R Block, its officers, employees and agents disclaim all liability (except for any liability which by law cannot be excluded), for any error, inaccuracy in, or omission from the information contained on this website or any loss or damage suffered by any person directly or indirectly through relying on this information. H&R Block Ltd ABN 89 064 268 800 is a Corporate Authorised Representative No. 001246230 of Accountable Financial Solutions Pty Ltd ABN 36 146 520 390 AFSL No. 409424
