Should you use an individual or corporate trustee for your SMSF?
Why corporate trustees are best
The vast majority of self-managed superannuation funds (SMSF) use an individual trustee structure. In fact, Australian Taxation Office (ATO) statistics show that more than 90 per cent of SMSFs set up in the last few years have selected this option.
Unfortunately, the vast majority of people are making a big mistake.
It's difficult to know precisely why people don't elect to use a corporate trustee structure for their fund, but it's safe to assume many are keen to keep costs down and, in their own mind, can't see the benefits of using a specially created company to act as trustee of their SMSF.
Those who spend a fair amount of time working with SMSFs will tell you that they see a wide range of problems with individual SMSF trustees.
The first problem is asset ownership. All super fund assets must be in the name of all trustees. Ideally, the investments will be held in a name similar to "Mary Jane and Robert James Smith as trustees for the Smith Superannuation Fund". The reason for denoting official asset ownership in this way is to avoid confusion. When an auditor checks over the fund each year, they are expected to confirm that this has been done and demand that errors are fixed.
Why can this be a problem? With an individual trustee structure, every time members retire, die, lose capacity, leave the fund or a new member is added to the fund, the trustees have to correct the ownership of the investments.
If your fund has many investments then a change in the fund's membership will take considerable time and effort as well as incur considerable cost. All share registries, banks and managed fund providers need to be advised. All real estate causes considerable hassle and cost. So while an individual trustee may be a cheaper option to start with, it could end up costing you more.
This is not the case with a corporate trustee because the assets are held in the name of the company set up by the members and since this name doesn't change, no adjustments need to be made to asset ownership records. The members only need to adjust the names of the board members for the corporate trustee.
Our second problem involves trust law. When a member leaves an SMSF with an individual trustee structure, it may cease to be a trust because it won't exist if the sole trustee is also the sole beneficiary. The super laws say that there must be at least two individual trustees, even if there is only one member, and the law allows six months to fix this problem. However, this six-month timeframe doesn't solve the problem that, under trust law, a trust may have ceased to exist.
Once again, this is not an issue for corporate trustees.
The third problem is the death of a member. Sometimes with individual trustees, the death of a member can cause almost unsolvable problems that effectively stall the SMSF. A good example of this is the New South Wales Supreme Court case in Australia, Katz v Grossman, which involved a deceased father's SMSF and the distribution of his super assets. Mr Katz and Mrs Grossman were the son and daughter of the deceased.
At the time of the father's death, both he and his daughter were individual trustees of the super fund. The son was not. The father had indicated that he wanted his death benefit to be shared equally between his two children, but the remaining trustee – the daughter – refused to follow this request and since she was a trustee, she had a right to overrule her father's wishes.
If the fund had had a corporate trustee and Mr Katz had completed a Binding Death Benefit Nomination, this problem might have been avoided.
Benefits of a corporate trustee
By using a corporate trustee, you're less likely to mix your non-super and super assets together. This final problem is quite common with individual trustees.
You might look through the above list of potential problems and conclude that they're unlikely to ever happen to you and your SMSF. Fair enough. In all likelihood, people who have fallen prey to some of these issues might have had similar thoughts.
Quite a few lawyers earn a handy revenue stream from fixing many of the problems that arise with individual trustees. From a purely mercenary point of view, some super lawyers might think individual SMSF trustees are a great idea. From a professional point of view most, when asked, recommend a corporate trustee to their clients.
One submission to the Cooper Review recommended that all super funds, especially SMSFs, should have to use a corporate trustee. I very much agree with this sentiment. Unfortunately, the Cooper Review and the Australian Government decided that individual trustees should continue to be allowed.
It's possible to set up a special purpose company that solely acts as trustee of your SMSF for about a A$650 upfront cost, including about A$400 paid to the Australian Securities and Investments Commission (ASIC).
Special-purpose companies incur an annual ASIC fee of A$43. Alternatively, you can elect to pay the ASIC fee 10 years in advance, in which case ASIC will only charge you A$324, or A$32.40 a year.
This means you can set up your SMSF trustee company for under A$1000 over 10 years, or about A$100 per year. This isn't excessive.
Converting your fund
If you now think you should convert your fund to a corporate trustee, please be aware that it can incur legal and administration costs. There are also a number of considerations to take into account:
- Your super fund's trust deed must allow a company to be used as trustee.
- Creating a company – it's better to create a company that doesn't do anything else; if you use another company that is the trustee of your family trust or runs a business, then your super fund's assets can easily be mixed up with the company's other activities.
- Inform the ATO – you must let the ATO know if your super fund's trustee has changed.
- Bank accounts – most banks will want to see the formal resignation of the individual trustees and the appointment of the corporation.
- Share registries and brokers – most of these will have similar requirements to your bank. However, some brokers insist that your individual trustee account be closed and a new account be created in the corporation's name.
- Real estate – any change to a property's title must be formally registered. In most states and territories, no or nominal stamp duty will be payable, but you'll need to prove to your State Revenue Office that there has been no change to the beneficial owner of the asset. This task must be completed by a solicitor.
- Lease documents – any super fund asset that is currently leased will have to be updated to take into account the new trustee. You will need a solicitor to complete this task for you.
An average total cost of between A$1000 and A$3000 can be expected, depending upon how many assets your super fund owns and what those assets are.
This article was extracted from InTheBlack, click here to read more. Published February 12, 2014
Tony Negline has worked in financial services for more than 20 years and has been heavily involved in SMSFs since mid-1994.