Corporate Trustee or Individual Trustee?
If you have a self-managed superannuation fund (SMSF), or are considering one, an important question to address is the trustee structure – that is, whether to have individual trustees or a corporate trustee?
One of the main reasons many people choose individual trustees is the simplicity and cost. It typically costs in the region of $1,000 or more to set up a company to act as the trustee of a SMSF, and there are additional yearly costs involved in the lodgment of an annual return with the Australian Securities and Investments Commission (ASIC). The regulatory fee is, however, cheaper for a company that only acts as a trustee of a SMSF (currently $53, compared to $263 for a proprietary limited company).
However, in our experience, the benefits of having a corporate trustee for your SMSF far outweigh the initial savings. Below are some key reasons to have a corporate trustee for your SMSF.
Whilst the initial membership and trusteeship of a SMSF may seem unlikely to ever change, in fact it often does. Sometimes children are admitted to a fund, a husband and wife may split up or, sadly, one of the trustees dies or loses capacity. Whenever the trusteeship of a SMSF changes, the name in which assets are held also needs to be changed. The names in which bank accounts, shares, managed funds and property all have to be updated.
Whilst sometimes this process is straightforward, often it is a massive administrative hassle, and one which the trustees may have to attend to personally, as often banks and other financial institutions will not deal directly with administrators or accountants. Also, if the death or incapacity of a trustee has occurred, this is often the last thing that a remaining trustee wishes to deal with at a difficult time.
If a SMSF has a corporate trustee, then on the admission or removal of members, only the directorship of the company changes. The documentation to appoint or remove directors is relatively simple and easy to arrange, and there are no changes required to the names in which assets are held, and no change required to the SMSF trust deed.
Succession and estate planning
Where a SMSF has two individual trustees, as is often the case, on the death of one of them, the question often arises as to who will exercise control of the SMSF. There is a need to appoint an additional individual trustee, or a corporate trustee in place of the remaining individual trustee, in order to keep the fund compliant.
For the remaining member and trustee, there may be no suitable person available to appoint as an additional individual trustee. If a family is in dispute, control over a SMSF may be very important to that remaining member.
If a corporate trustee is in place, there is usually no question as to who controls the trustee – the remaining member and director of the corporate trustee. And as there is no need to change the trustee, it is difficult for any other person to wrest control over a SMSF in these circumstances.
Exposure to litigation
One of the most important reasons to have a corporate trustee is litigation exposure. Individuals acting as trustee of a SMSF are jointly and severally liable for any actions taken against the fund, as they hold the assets of the fund in their individual names. Litigation may arise, for example, if a tenant is injured at a property owned by the SMSF. Should any litigation against a fund exceed the assets held in the fund, the personal assets of individual trustees may become at risk.
Companies on the other hand have limited liability. This ensures any litigation against a SMSF to the assets held in the name of the company and do not stretch to the directors of the company. If the company is only the trustee of the SMSF, this will ensure any claim against the fund is limited to the assets held by the company as trustee for the fund, and no personal assets of directors will be at risk.
Sole member funds
If a SMSF with individual trustees has a sole member, the superannuation legislation requires that the fund must have a second individual trustee in order to be a compliant SMSF. If a sole member has no spouse or children, this will mean that the member will have to relinquish some control over the fund to another person.
Alternatively, a sole member SMSF can have a company as trustee with either one or two directors, one of which must be the member. In this case a sole member can have total control over the SMSF by being the sole director of the corporate trustee.
If a SMSF happens to fall foul of the superannuation legislation, the Taxation Office has the ability to impose administrative penalties for some breaches, ranging from $1,050 to $12,600. Any administrative penalty imposed on a company would only apply once – whereas a penalty can be imposed on each individual trustee for each contravention. Having two individual trustees, for example, potentially doubles the administrative penalty that would apply to a corporate trustee.
McConachie Stedman Financial Planning is an Authorised Representative of Wealth Management Matters Pty Ltd | ABN 34 612 767 807 | AFSL 491619