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Establishing an SMSF – 7 reasons to use a corporate trustee

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David Court Partner Linkedin

Like most professional advisers, we are strongly of the view that a self-managed superannuation fund (“SMSF”) should have a corporate trustee. This article looks at the trustee requirements for SMSFs and sets out a number of reasons for preferring a corporate trustee.

An SMSF may either have a sole corporate trustee or individual trustees. If the SMSF has a corporate trustee, then each member must be a director of the company and the company may not have any other directors. Similarly, with individual trustees the members must generally be the only trustees.

The decision as to whether an SMSF has a corporate trustee or individual trustees, needs to be made at the time that the fund is set up. While it is possible to change the trustee structure later, it is not a simple or a cost-free exercise to do so.

The only real advantage of individual trustees is that the fund is cheaper to establish and operate as you do not need to incorporate and maintain a trustee company. These initial cost savings mean that roughly 70% of SMSFs are established with individual trustees. However, they can ultimately prove to be a false economy.

Set out below are seven good reasons for having a corporate trustee.

1. Ease of administration

The admission of new members to the fund (such as children) and the acquisition and disposal of assets, are much simpler with a corporate trustee. The legal ownership of the fund’s assets do not need to be changed every time a member joins or leaves the fund. It is also easier to show that the fund remains an Australian resident fund if members move overseas for a period of time.

2. Succession flexibility

Unlike people, companies do not die and the death of a member in a fund with a corporate trustee causes no immediate problems. However, when an individual trustee dies, action needs to be taken to ensure that the SMSF does not lose its tax concessional status. There have been a number of Court cases in recent years involving disputes arising from the death of a member which would have been less likely to arise if a corporate trustee was used.

Having a corporate trustee also provides a better structure for handling member incapacity and divorce situations.

3. Commercial necessity

For an SMSF that is wanting to use a limited recourse borrowing arrangement, it is almost certain that the lending bank will require the fund to have a corporate trustee. It also makes it easier to show that the assets of the SMSF have been kept separate from the client’s personal assets.

4. Sole member status

If an SMSF with individual trustees reduces to only one member (e.g. the marriage of the members ends or a member dies), then the remaining member will not be able to continue the trusteeship of the SMSF by themselves and will need to find an additional trustee for the fund. With a corporate trustee, a remaining member can continue on as sole director of the company.

5. Asset protection

Companies have limited liability and provide greater protection in cases of the SMSF becoming insolvent. Directors of a company are generally not personally liable for the debts of the company. However, each individual trustee of an SMSF is joint and severally liable for the liabilities of the fund – but have a right of indemnity out of fund assets.

6. Lower penalties

Under the penalty regime for SMSFs, only one penalty is applied to a fund with a corporate trustee. However, each individual trustee is penalised personally – meaning at least double the penalty as there cannot be less than two individual trustees.

7. Benefit flexibility

Funds with corporate trustees can pay benefits in either lump sum or pension form. However, a fund with individual trustees must have a primary purpose of paying pensions which makes it more difficult to convert a pension to a lump sum at a later time.

One final point. Although any form of company may act as trustee of an SMSF, we strongly suggest that a sole purpose company is used. This attracts a lower annual ASIC fee and has the advantage of keeping the affairs of the SMSF separate from other business and family interests.

If you advise in setting up an SMSF, make sure you address the issue of corporate vs. individual trustees as part of your advice.