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| The right SMSF Trustee structure - Individual or Corporate? Is it better to have an Individual or Corporate Trustee? 70% of Self Managed Super Funds (SMSFs) established prior to 30 June 2009 had individual trustees. In 2008 and 2009, nearly 90% of SMSFs were established with individual trustees.
These statistics are surprising when you consider the benefits of having a sole purpose company act as trustee of an SMSF.
The final report of the Cooper Review identified some of the following benefits of a corporate trustee: >> Perpetual succession - the corporate entity cannot die, so it enables better control in the event of member death or incapacity; >>Greater administration efficiency; >> Greater estate planning flexibility; and >> Reduced risk of deliberate or accidental intermingling of fund and personal assets, in breach of the covenant in section 52(2) (d) of the SIS Act. The following information outlines the advantages and disadvantages of using either an individual or corporate trustee structure for an SMSF:
Sole Trustee/Member
All members of an SMSF are required to be a trustee of the SMSF or a director of the trustee company. A single member fund with a sole purpose company as trustee can have a single director of the trustee company. However, a sole individual trustee in an SMSF is not permitted.
Perpetual Succession
If there are two members in a fund and one dies, the SMSF with individual trusteeswill need to replace the member (and trustee) as the SMSF cannot operate with only one individual as trustee. Therefore the fund will need to be restructured and the registered name of all assets in the fund will need to be changed to reflect the change of individual trustees. This can be time consuming and expensive.
However, if the SMSF has a corporate trustee and two directors and one dies the trustee company can continue without the need for an additional director. An SMSF with a corporate trustee can operate with one or two directors (provided one of the directors is also a member of the fund). Therefore, no restructure of the fund or change in name of assets is required. Administration
As mentioned above all members of SMSFs are required to be trustees or a director of the trustee company. When there is a change in member, for example if a new member joins or a member leaves, then the trustees or the directors of the trustee company needs to change. Both scenarios require the ATO to be notified of the change within 28 days of the change, but that is the only similarity.
Individual trustees- this change can be a costly and time consuming exercise for trustees, particularly where the fund has a large number of investments; for example, numerous parcels of shares with different registries or stock brokers. Another administration issue arises where the SMSF assets include real estate. In this case the change in ownership, depending on the state in which the property is located, may incur additional stamp duty. Corporate trustee- there is no change to the trustee company itself, just a change in the directors of the company. As the assets of the fund are held in the name of the corporate trustee there is no need to change ownership of the fund assets when there is a change in director. Estate Planning
As mentioned previously a company is an indefinitely continuing entity. Consequently having a company as trustee for an SMSF ensures control - an important factor when a member of the fund dies.
Individual trustees - if an individual trustee passes away, in order for the fund to remain an SMSF, the surviving individual trustee must appoint a new trustee. While a remaining trustee may assume the role of the deceased temporarily (in the capacity of a Legal Personal Representative or Executor of the deceased's estate) once the deceased's benefit has been dealt with in the fund another person will need to be appointed as a second individual trustee. This person may be an adult child or relative, which could mean the surviving trustee may have to relinquish full control of the fund. Corporate trustee - with a corporate trustee if one member passes away they simply cease to be a member of the fund once their benefit has been dealt with. The surviving member can continue as sole member and director of the corporate trustee and not have to cede control to another party. Legal Liability
Individual trustees - hold assets of the fund in their own names as trustee for the SMSF and are therefore jointly and severally liable for any legal action taken against the fund. This has the potential to place their personal assets at risk to legal challenge. Corporate trustees- hold assets in the name of the company, which has limited liability. This ensures litigation against the trustee of the fund is limited to the assets held in the name of the company and does not extend to the directors of the company (unless they are fraudulent in their duties). If the company is a Special Purpose Trustee Company any claim against the fund is limited to the assets held by the company as trustee of fund and no director's assets will be at risk. Cost
Regardless of whether the fund has an individual or corporate trustee the SMSF is required to lodge an SMSF Annual Return and pay an annual supervisory levy to the ATO. However, there are some differences, as outlined below:
Individual trustee - there are no additional costs on set up to have individuals as trustees of the SMSF.
Corporate trustee - If a decision is made to set up a sole purpose company to act as trustee of the SMSF then there is the initial cost of the company set up. The company is also required to lodge an annual return to ASIC. A reduced annual fee applies to annual returns for companies whose sole purpose is to act as trustee of an SMSF.
Penalties Civil and criminal penalties for breaches to SIS apply to both individual and corporate trustees. Penalties will vary depending on the severity of the breach.
Individual trustees - each penalty unit is currently worth $110. The maximum financial penalty for an individual trustee is 2,000 penalty units (ie $220,000). Corporate trustees - the maximum financial penalty is 5 times the amount for an individual trustee (ie 10,000 penalty units or $1.1m). Article provided by Super Concepts
Please contact your Silvan Ridge Financial Services adviser on 03 5559 7111 to discuss any queries. | ||||||||||
