Whilst establishing an SMSF with individuals acting as trustees may save a few dollars in the short term, the benefits of registering a corporate trustee for any new SMSF can far outweigh the short term savings and I’ll explain why.
Reason 1 – Succession upon death
A company is an indefinitely continuing entity. Having a company as trustee for the Fund ensures control of the SMSF is always certain – an especially important factor when a member of the SMSF dies.
Reason 2 – Trustee litigation exposure
Another important reason 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. Should litigation against the Fund exceed the assets held in the name of the trustees (as trustees for the Fund), the personal assets of the individuals may become at risk.
Companies, on the other hand, 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.
Reason 3 – Administrative Efficiency
One of the key benefits of a SMSF is its fluidity – such as allowing multiple generations of a family to come and go from the Fund. Instances of changes in membership to a SMSF may 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 members 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.
Whenever a change in membership occurs, a change in trusteeship is generally also required to occur, if the SMSF has individual trustees.
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.
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.
There are also legal fees associated with a deed of appointment needed every time you change ownership.
Essentially, the admission and removal of individual trustees can be a costly and time consuming exercise.
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.
The assets are still held in the same name – that is, the name of the company – so there is no need to change the name in which the assets of the Fund are held saving clients time and money.
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 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 4 – SMSF Borrowing
As a rule, the vast majority of banks lending to SMSFs in relation to Limited Recourse Borrowing Arrangement (LRBA) 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, an 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 5 – SMSF Administrative Penalties
The Australian Taxation Office (ATO) has authority apply monetary penalties to trustees of SMSFs in the event of certain breaches of the SIS Act.
If an 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).
Reason 6 – Sole Member Funds
If an 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, 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.
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.
Further to this, the ongoing cost of a sole purpose SMSF trustee company, the ASIC levy, is $49 per annum.
Therefore, after overcoming the initial registration costs, the ongoing costs are minimal.
Given all of the above, the amount of money ‘saved’ by not registering a company to act as corporate trustee of the SMSF can prove to be false economy.
Written by Olivia Long, Managing Director – SMSF
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