Give your SMSF a corporate trustee
- Most SMSFs have individual trustees but would benefit from a corporate trustee despite a small extra cost
- If you’re setting up an SMSF, we recommend a corporate trustee
- If you already have an individual trustee, consider an appropriate time to change before you’re forced into it by circumstance
One of the first questions for everyone that sets up an SMSF is: Should I have a corporate trustee? According to the statistics, most SMSF members say ‘no’, but they should be saying ‘yes’.
The basic requirements for SMSF trustees (as set out in the ATO guide Running a self-managed super fund) are as follows:
- Where the fund has a single member. The member and another person (but not an employer) must act as trustees. Alternatively, the trustee can be a company, with the member as sole shareholder and director.
- Where the fund has multiple members. Each member must be a trustee or must be a director of a single trustee company.
These requirements highlight the fundamental advantage of using a corporate trustee: You end up with just one trustee, a far simpler and more manageable structure that delivers a number of valuable benefits.
Why people prefer individual trustees
A corporate trustee costs roughly $700 upfront to establish (or about $400 if you do it yourself through the ASIC website). There’s also a bit of paperwork to do to get the company up and running and ongoing requirements to hold board meetings. But the paperwork requirement is negligible. Cost is the key consideration.
Setting up an SMSF with individual trustees on the other hand costs nothing extra. That’s why most people opt for it.
As most SMSFs will have a lifespan of over 20 years, even with the annual $50 fee to ASIC (for a special purpose trustee company) included the cost of having a corporate trustee is less than $100 per annum.
Wouldn’t you rather pay that and have one single trustee for the life of the fund? Let’s explain why your answer should, in most cases, be ‘yes’.
The benefits of corporate trustees
There are four major benefits in having a single, corporate trustee:
- Administration. Multiple individual trustees can become an administrative nightmare. Every single asset held by the SMSF will need to have its ownership changed if a member departs (either voluntarily, or on death) or is added down the track. If you have four members, you'll often be chasing four signatures. A corporate trustee also helps prevent co-mingling – SMSF assets being mixed up with personal assets – and messing up the title (since the name of the fund is simpler).
- Death. A corporate trustee also avoids the scenario, likely for many funds with a couple as the only members, where the death of a partner leaves the SMSF as a ‘single member fund’. The remaining partner, during a very difficult time, not only needs to change the ownership of all fund assets but needs to find someone to act as the other trustee before they can do so themselves. Isn’t it worth $100 a year to avoid that?
- Limited liability. There is a risk that any legal claim against an SMSF is also mounted against the trustee(s). With individual trustees, you may end up a party to court action – with personal assets at risk – but, with a corporate trustee; the nature of a limited liability company reduces that exposure.
- No need for an outsider. A corporate trustee allows you to have a single member SMSF without the need for a non-member to act as a trustee. Whether the fund is single member from the outset, or becomes one on the death of a member, the need to involve someone else in your financial affairs is avoided. The court case Katz vs Grossman (relevant to those with less harmonious family circumstances) highlights how badly this can go wrong. In that case the ‘new’ trustee (the daughter of the original members) was legally able to circumvent the intentions of her parents. She captured the benefit of the entire fund at her brother’s expense.
- Reduced penalty exposure. Under the new penalty regime that started on 1 July 2014 (see Penalties for SMSF trustees: The speeding ticket rules), fines are imposed on a ‘per trustee’ basis. This means an SMSF with multiple individual trustees is exposed to higher dollar penalties than one with a single corporate trustee.
The benefits of using a corporate trustee won’t be the same for everyone. A fund run by a husband and wife, with bank accounts, shares and managed funds for example, has less need for it than a multi-member family fund with a range of investments, including property (where the risk of litigation is higher).
But there might be situations where you need a corporate trustee. Banks may either lend only to SMSFs with corporate trustees or provide a higher loan to valuation ratioA loan to valuation ratio (LVR) is a financial ratio that is also often used as a condition in lending facilities. It's calculated by dividing the loan balance by the value of the property which secures the loan. For example, if you had a $60 margin loan against shares worth $100, the LVR would be 60%. (LVRA LVR (loan to valuation ratio) is a financial ratio and is often used as a condition in lending facilities. It's calculated by dividing the loan balance by the value of the property which secures the loan. For example, if you had a $60 margin loan against shares worth $100, the LVR would be 60%.) with a corporate trustee in place.
Remember, every SMSF faces the prospect of eventually becoming a single member fund and unless you have someone ready to step into the breach, a corporate trustee might at that point become a necessity.
If you’re setting up a new SMSF, the case for a corporate trustee is compelling. But if you’ve already set up your SMSF with individual trustees, it’s not quite so simple because of the work involved in switching.
Should we switch?
Liam encourages all his clients to use, or make the switch to, a corporate trustee, although it can be difficult where property is involved. Whether you should switch depends on your personal situation, including the assets you own and the state in which you live.
Changing the title documents for property, for instance, may require a lot of paperwork, including lodging forms with the Office of State Revenue (the department which collects stamp duty). Depending on the state you live in, you may also have some stamp duty to pay.
Even something like a term deposit can, depending on the institution, be a nightmare when it comes to changing the names on the account. But if your bank isn’t a pain and you have fairly simple investments, switching trustees may not be a big deal.
This is where an interesting conundrum emerges: Those with the most to gain from a corporate trustee are likely to have the hardest time switching. Remember, painful or not, every SMSF without a corporate trustee is going to have to go through changing trustee(s) at some point. And some will end up doing it more than once.
Death (or incapacity) of a member, adding a member, or a member wishing to depart (for instance, as a result of divorce) will all trigger this process. Whilst the trigger point may be some way off, the downside is that the timing won’t be of your choosing. Indeed, it may end up being the worst possible time.
Of course, everyone’s circumstances are different and this is not a process you want to get wrong. You should seek personal legal or financial advice before taking the plunge.
What if I’m perfectly happy with individual trustees?
A corporate trustee is generally preferred, but this guidance is not absolute.
For instance, a financially astute couple, with (happy) family members ready to step in as trustees if necessary, may see no need to change. They might have no intention to allow new members, borrow to buy property and be easily able to deal with the necessary administration in the event of the death or incapacitation of one of them (some people intend that they would simply make the switch to a corporate trustee at that time).
Remember to be alert to changes in your circumstances. For example, a future decision to buy (or sell) property might make that a suitable time to make the switch.
If you’re setting up an SMSF today, corporate trustees offer a number of benefits at very little cost. Members with SMSFs using individual trustees should consider switching, or keep an eye on when a switch may be appropriate.
Liam Shorte is a principal of Verante Financial Planning Pty Ltd (www.verante.com.au), a corporate authorised representative of Magnitude Group Pty Ltd (AFSL 221557). This article is a general information article and to the extent it contains any financial advice it is general advice only. We recommend seeking personal advice on your own circumstances.
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