7 Reasons to Have a Corporate Trustee for Your SMSF

Are you contemplating whether to appoint a company as the Corporate trustee for your Self-Managed Super Fund (SMSF), or to serve as an individual trustee yourself? This decision is more than just administrative; it shapes the foundation of your fund’s future, impacting everything from succession planning to legal liability. Navigating this choice requires a clear understanding of the implications each option holds.

In this article, we delve into the key reasons why opting for a corporate trustee could offer significant advantages for your SMSF, providing stability, protection, and flexibility that aligns with your long-term financial goals.

Reason 1 – Succession upon death

A company can last forever, making it a reliable choice to manage a Self-Managed Super Fund (SMSF). This means, having a company as trustee for the Fund ensures control of the Self-Managed Superfund (SMSF) is always certain – an especially important factor when a member of the SMSF dies.

Example:

Bill and Tania are members of an SMSF, with both serving as individual trustees. When Bill passes away, Tania becomes the sole remaining member and trustee of the Fund. To keep the SMSF compliant, Tania must find another trustee to join her. Typically, she has to do this within six months after starting to pay out benefits due to Bill’s death, which means she won’t have total control over the Fund anymore.

There could be several outcomes in this situation. For example, if Tania has children, she might want to make them trustees of the Fund. This would require filling out forms to add them as members and trustees of the SMSF and changing the ownership of all the Fund’s assets to their names. If Tania doesn’t have children or close relatives she trusts to manage the Fund with her, she might choose to set up a company to act as the trustee. By being the only director of this company, Tania can keep full control of the SMSF.

In this case, she’d need to create the company and complete the necessary paperwork to switch the Fund’s trustee to this company. She’d also need to change the ownership of the Fund’s assets to the company’s name.

If Bill and Tania had initially set up their SMSF with a corporate trustee, Tania wouldn’t face any of these complications after Bill’s death. His membership would end, and Tania could continue as the sole member of the Fund and the sole director of the corporate trustee company. This setup would avoid the need for another trustee, any changes in trusteeship paperwork, or altering the ownership of the Fund’s assets. Plus, Tania would keep complete control over the Fund automatically.

Reason 2 – Corporate Trustee litigation exposure

Another important advantage of having a corporate trustee relates to reducing the risk of litigation. When individuals serve as trustees for a Self-Managed Superfund (SMSF), they are jointly and individually responsible for any legal actions against the Fund, as they personally hold its assets. Consequently, if legal claims surpass the Fund’s assets held by the trustees, the personal assets of those individuals could be at risk.

Companies have limited liability. This generally ensures litigation against the Fund is limited:

• firstly, to the assets held in the SMSF; and
• secondly, to the assets held in the name of the company itself.

Liability generally does not extend to the directors of the company. If the company is a sole purpose SMSF trustee company, this will generally ensure any claim against the Fund is limited to the assets held by the company as trustee for the SMSF, and no director’s assets will be at risk.

The joint and several liabilities of individual trustees were highlighted in the 2011 AAT case regarding “Shail Superannuation Fund”, where Mr and Mrs Shail were the individual trustees of their SMSF. Mr Shail fled Australia after transferring almost $3.5 millions of SMSF money to an overseas bank account. The ATO then assessed the trustees for tax and penalties of more than $1.5 million. As the SMSF had minimal funds remaining, Mrs Shail was personally required to meet the liability.

The above scenario would have resulted in a different outcome had the trustee of the SMSF been a corporate entity. 

Reason 3 – Administrative Efficiency

One of the standout advantages of a Self-Managed Super Fund (SMSF) is its flexibility, particularly in accommodating family dynamics over time. This flexibility allows for multiple generations within a family to join or leave the Fund as circumstances change. 

Examples of situations where changes in Self-Managed Superfund (SMSF) membership might occur include:

• Parents admitting their children into the Fund;
• The marriage of an existing member of the SMSF to a non- member of the Fund;
• The divorce of members within the Fund;
• Upon the incapacity of a member of the Fund, where their Legal Personal Representative is appointed as a trustee of the SMSF in that member’s stead; or
• Upon the death of a member of the Fund, where their Legal Personal Representative is appointed until the death benefits have been paid.

Let’s explore how changes in membership can impact the management of the Self-Managed Superfund (SMSF), particularly in the context of individual vs. corporate trustees: 

1. Whenever a change in membership occurs, a change in trusteeship is generally also required to occur, if the SMSF has individual trustees.

2. The fact trustees and members can come and go easily from a SMSF, raises a time consuming and costly administration problem for SMSFs with individual trustees, as the law requires the assets of SMSFs to be held in the names of all of the trustees of the Fund.

3. Consequently, whenever a new trustee is appointed to the Fund, or an existing trustee leaves the Fund, the Fund is required to notify all relevant registries and offices (and provide a range of documents) to change the name or names under which the assets of the SMSF are registered.

4. Furthermore, legal advice as to the procedures to remove / appoint the trustee and member, as determined by the Fund’s trust deed, must also be taken. Overall, the admission and removal of individual trustees can be a costly and time-consuming exercise.

5. In contrast, when a new member joins a SMSF with a corporate trustee, the corporate trustee itself does not change, only the underlying directorship of the company changes.

6. The assets are still held in the same name – that is, the name of the company – so there is no need to change the asset holders name in which the assets of the Fund are held.

Reason 4 – Lump Sum Payments

For a Self-Managed Superfund (SMSF) to receive its concessional taxation status, it must elect to be regulated by the ATO and comply with the laws and regulations outlined in the Superannuation Industry (Supervision) Act 1993 (SIS Act) and Superannuation Industry (Supervision) Regulations 1994 (SIS Regs).

Section 19 of the SIS Act is very specific in its determination of what constitutes a regulated SMSF, effectively stating that the trustee must either be:

• a constitutional corporation; or
• the purpose of the Fund must be to pay a pension or pensions.

The consequence of this is that the SMSF must either have:

• a corporate trustee; or
• individual trustees, in which case the SMSF must have, as its sole or primary purpose, the payment of old age pensions.

The effect of the legislation is that a SMSF with a corporate trustee may pay benefits as either a lump sum or a pension. However, SMSFs with individual trustees must, in the first instance, aim to pay benefits in the form of pensions.

Strictly speaking, in order for a Self-Managed Superfund (SMSF) with individual trustees to compliantly pay a lump sum benefit, the member receiving the benefit would have to provide a written request to the trustees for the payment to be made as a lump sum benefit.

Reason 5 – SMSF Borrowing

If it is intended that the Self-Managed Superfund (SMSF) will borrow to acquire an asset or an Investment Property under the limited recourse borrowing arrangement provisions (LRBA), lenders may require that the SMSF have a corporate trustee.

As a rule, the vast majority of banks lending to SMSFs in relation to LRBAs impose a requirement that all loans for the purchase of residential property by a SMSF have a company as the trustee of the SMSF.

Therefore, a Self-Managed Superfund (SMSF) established with individual trustees may need to go through the process of appointing a corporate trustee and, following that, convert the assets owned by the SMSF into the name of the new trustee of the Fund should the Fund decide to enter into a LRBA.

Reason 6 – SMSF Administrative Penalties

The Australian Taxation Office (ATO) has authority to apply monetary penalties to trustees of SMSFs in the event of certain breaches of the SIS Act.

If a SMSF has individual trustees, each trustee may be liable to pay the ‘administrative penalty’. Alternatively, if the SMSF has a corporate trustee, the penalty is levied on the company (and each director is jointly and severally liable to pay that penalty).

This is explained in examples contained in the Explanatory Memorandum to the Bill introducing the administrative penalties.

In the examples, a SMSF has contravened section 35B of the SIS Act, which requires preparation of the accounts and statements for the Fund and contains an administrative penalty of 10 units.

The examples indicate that:

• with individual trustees, each trustee would be liable for the 10-unit penalty; whereas

• with a corporate trustee, the 10-unit penalty would be applied once only (i.e. to be shared amongst the directors).

Reason 7 – Sole Member Funds

If a Self-Managed Super Fund (SMSF) with individual trustees has a sole member, the SIS Act requires that the SMSF must have a second individual trustee. This will mean that the sole member will have to relinquish some control over the Fund to another person.

Alternatively, the SIS Act provides that 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 assume total control over the SMSF by appointing themselves as the sole director of the corporate trustee.

A sobering thought – the vast majority of SMSFs are established as two member Funds, predominantly with husband and wife as the members. Therefore, the members are not concerned, at that stage, with issues relevant to single member SMSFs.

However, through either death or divorce, those SMSFs are likely to become single member Funds at some point in the future.

Bonus Considerations – Costs in establishing a Company as Trustee

Some are put off by the initial cost involved in establishing a company to act as trustee of the SMSF.

However, the actual costs associated with a sole purpose SMSF trustee company are low compared to the extra costs that can be incurred with individual trustee SMSFs, especially in documenting trustee changes.

In addition, if you also consider the succession and litigation advantages of a company over individuals, the overall cost effectiveness of a company will generally outweigh the initial incorporation costs.

Further to this, the ongoing cost of a sole purpose SMSF trustee company, the ASIC levy, is $63 (Subject to change in future) per annum. Therefore, after overcoming the initial registration costs, the ongoing costs are minimal.

In conclusion, the choice between individual trustees and a corporate trustee for your Self-Managed Super Fund (SMSF) is not just a matter of preference but a strategic decision that impacts the fund’s succession, legal standing, administrative efficiency, and financial flexibility. The advantages of opting for a corporate trustee—ranging from uninterrupted succession and reduced litigation exposure to streamlined administrative processes and enhanced borrowing capabilities—underscore the importance of this decision in safeguarding the future of your SMSF and ensuring its compliance and operational effectiveness.

If the process of establishing your business, investment, or SMSF structure seems daunting, or if you’re seeking expert guidance to navigate the complexities of corporate trusteeship, the Tax and Structure specialists at Investax Group are here to assist. With a deep understanding of the legislative framework and a commitment to personalised service, our team is equipped to provide the support you need to secure your financial future. Don’t hesitate to reach out to Investax Group Tax and Structure specialists today for a consultation and take the first step towards optimizing your SMSF’s potential.

Reference- 

https://taxtechnical.com.au/re-shail-superannuation-fund-and-fct-non-complying-smsf-deduction-not-allowed-for-misappropriated-funds-wife-trustee-left-holding-the-baby-after-husband-trustee-stole-the-fund-su3/

http://classic.austlii.edu.au/au/legis/cth/consol_act/sia1993473/s166.html