More than 90% of recently established self managed superannuation funds (SMSFs) operate under an individual SMSF trustee structure rather than a corporate trustee arrangement, according to statistics released by the Tax Office. Although the latter is the less utilised option, does that mean it is the less wise choice? We examine the pros and cons of each trusteeship arrangement below.
Benefits of the corporate SMSF trustee structure
1. Asset ownership
Under an individual trusteeship, all SMSF assets must be in the name of all trustees. Each time a member of a fund with an individual trusteeship dies, retires, loses capacity, leaves the fund or a new member joins the fund – trustees are required to amend the ownership of their investments by notifying all relevant share registries, banks and titles offices. Complications may arise if your fund has numerous investments – particularly in real estate and shares – because a transfer of the new titles for all assets is likely to require a significant amount of time, effort and money. Trustees must also prepare a deed of appointment and retirement for each incoming and outgoing trustee. Conversely, when a corporate trustee is utilised, the addition or retirement of a member of the fund requires only notification of a change of directors. The legal title of all assets remains vested in the company which continues to act as a trustee. All corporate trustees have to do is notify the Australian Securities and Investments Commission (ASIC) within 14 days of the change.
2. Number of members
According to trust law, a sole member SMSF cannot exist in an SMSF where there are individual trustees. A sole member SMSF must have at least two individual trustees and whilst the second person does not have to be a member, they do have to be actively involved in the trustee decisions made in relation to the fund – a disadvantage if a trustee wants full control. Further, the incoming person would be required to sign a ‘trustee’s declaration’ which is designed to make trustees fully accountable for their actions and fund compliance.
Under a corporate trustee structure, a sole member SMSF can exist. An SMSF can have an individual who is both the sole member and the sole director of the trustee company.
3. Succession upon death
When an individual trustee leaves a fund or dies, the fund may face administrative difficulties, for example if it is reduced to a single member fund. However, a company has an infinite life span therefore the operation of a corporate trustee SMSF can continue even after the death of an individual SMSF member/director. In relation to this, a corporate trusteeship ensures greater flexibility for estate planning as the trusteeship does not change as a result of the death of a member.
4. Liability of the trustee
If an individual trustee is subject to litigation, their personal assets may be exposed if their right of indemnity against the SMSF is not sufficient to discharge the liability. On the other hand, if a corporate trustee goes into liquidation, the assets of the fund are outside the reach of creditors because companies are subject to limited liability.
Benefits of the individual SMSF trustee structure
1. Red tape
Individual trustees do not have to complete ASIC forms in the event of a change in the fund and membership nor ongoing ASIC annual reviews as corporate trustees do. A corporate trustee also has to ensure that it adheres with both the constitution of the company and the requirements of the trust deed. While individual trustees also have to adhere to the requirements of their trust deed, they have fewer procedural issues to consider as there are more flexible requirements for holding trustee meetings.
2. Set-up costs and fees
The fund can be less costly to establish if you are an individual trustee as you don’t have to set up a separate company to act as trustee. The average establishment fee for an individual trustee is approximately three times less than that of a special purpose SMSF trustee company. While establishing a company will be a substantial expense at the start, it will not be a significant ongoing cost – corporate accounting costs are minimal.
Both individual and corporate trustees have to lodge an SMSF annual return and pay an annual supervisory fee to the ATO. On top of that, corporate trustees have to pay an initial ASIC registration fee and a lesser, ongoing annual review fee to ASIC. Other annual costs for both trustees include optional financial adviser’s and accountant’s fees and the obligatory auditor’s fee. Both trustees have to appoint an independent approved auditor to audit the fund each year.
3. Penalty unit regime
Under the Superannuation Industry (Supervision) Act, courts have the ability to impose a higher fine on companies rather than individuals – the company fine is five times more than the individual one.
4. Parent and minor children members
An SMSF operating under an individual trustee structure is currently the only SMSF where there can be a child member of the fund under the age of 18 as the parent or guardian can act as a trustee for the child. If a member of an SMSF is a minor and does not have a legal personal representative, the member’s parent or guardian may act as a trustee of the fund on the member’s behalf.
A corporate trustee SMSF was traditionally regarded as not appropriate for child members under the age of 18 because a minor cannot be a director of a company and super law requires that all members of a corporate trustee fund be directors of the trustee company. However, a proposed new law is intended to abolish and replace the section of the act pertaining to that rule – thus allowing a parent or guardian of a minor child member to be a trustee-director in the member’s place if the member does not have a legal personal representative. The law is currently before Parliament and if passed, the change to the act will apply from 8 October, 1999.
Having reviewed all options, can I change my current SMSF trustee structure?
Yes, you can. However, bear in mind that as with any change, it will be necessary to amend the trust deed, report the change to the Tax Office and transfer all assets into the name of the new trustee.
Regardless of what trustee structure you may choose, bear in mind that it is crucial you remain compliant as the Tax Office will scrutinise several key areas in 2012 – newly registered SMSFs and the lodging of their first annual returns, related-party transactions, exempt current pension income, non-arm’s length income as well as re-reporting of contributions.