Are you ignoring the advantages of a corporate trustee structure?
A corporate trustee structure may offer SMSFs greater certainty than an individual structure.
When setting up an SMSF practitioners must select between an individual or corporate trustee structure. For the SMSF owner, the chosen trustee structure will have an impact on how the fund is administered, the legislative considerations to abide by, and the cost of setting up and running the fund.
In Australia, SMSF owners and practitioners are still very heavily biased towards the individual trustee structure. According to the ATO, around 95% of new SMSFs were set up with individual trustees in 2015. This means around 78% of Australian SMSFs overall now have individual trustees. Despite this bias, the initial cost savings of using the individual trustee structure are often overridden by risks for SMSF owners using this structure.
In this article, we shed light on some the considerations when it comes to making a decision about how to structure your SMSF.
A corporate trustee has an indefinite presence. This means you can add or remove a member without the requirement of changing the ownership of the assets in the fund. On the other hand, under an individual trustee structure, if a member leaves or passes away, the other member(s) are left to change ownership of the assets.
It is also a requirement that there are at least two individual trustees, as compared to just a single director in the case of a corporate trustee. Because of this, if there were only two individual trustees in the first place when one leaves or dies, a new trustee needs to be appointed within six months. This can sometimes mean appointing someone very quickly without the luxury of taking the time to fully explore the best range of options and find the right person.
The importance of continuity is best illustrated by the case of Katz v Grossman (2005) NSWSC 934. In this situation, a family feud took place between a brother and sister as a result of the individual trustee structure. The mother and father were the original fund trustee members but, upon the mother’s death, the father appointed their daughter (not son) as the replacement trustee member.
Upon the later death of the father, the daughter appointed her husband (not brother) as the new trustee, resulting in all funds being in the control of the daughter. As trustees of the fund with full control of its assets, the daughter and her husband decided to pay the death benefit out to the daughter only, making no payment to the son. If the parents had instead used a corporate trustee, the father could have remained as a sole director – negating the need for the daughter to become a trustee with full control of the superannuation fund. On his death, Mr. Katz’s executors would have instead been in control of the fund.
All trustees are liable to members for any losses incurred as a result of a breach of trust. However, while individual trustees are personally liable (meaning their material assets may be exposed) corporate trustees are liable only to the extent of the assets of the company. This means that using a corporate trustee can maximise asset protection, while minimising the risk associated with personal liability.
A common situation where asset protection becomes paramount is where an SMSF owns real property, and an accident occurs on the property. This can result in a significant personal injury claim. In this instance, individual trustees are required to pay any court order brought down against the SMSF. If SMSF assets don’t satisfy the order, the personal assets of trustees are at risk. Corporate trustees, on the other hand, will have a right of indemnity from the SMSF.
From July 1, 2014, the ATO acquired the power to impose regulatory penalties on SMSF trustees for certain breaches of superannuation law. The result of this is that in the case of an individual trustee structure, all SMSF members could receive a penalty for every single infringement.
If the SMSF is using a corporate trustee structure on the other hand, and the trustee is exposed to penalties, it is only subject to one penalty amount as opposed to all members, per violation. The directors of the corporate trustee are jointly and severally liable to meet the penalty amount.
About the author
Deanne Firth FCA is a SMSF Specialist whose focus is on all things Super at Tactical Super
. She is a fellow of the Institute of Chartered Accountants.