Tuesday, February 11, 2020

SMSF trusteeship: Individual v Corporate ... every 1s a winner**

View Legal blogpost 'SMSF trusteeship: Individual v Corporate ... every 1s a winner**' by Matthew Burgess

The debate about whether to use a company or individuals as the trustee of a self-managed superannuation fund (SMSF) is longstanding and arguably ongoing.

Here are the 9 top reasons we see most specialist advisers recommending there is only one winner to the debate, namely - always use a corporate trustee.

1. Costs
Often, cost is used as the key reason for not having a corporate trustee.

The reality is that the company establishment cost and relatively nominal ongoing ASIC fees (particularly if a special purpose company is used, allowing access to the concessional ASIC annual fee for SMSF trustees) are significantly less than the costs associated with individual trustees.

This is especially stark in an estate planning context - the death of a director results in one ASIC form being lodged. The death of an individual trustee causes the need for a formal deed of change of trustee and then the subsequent notification to every asset register. This process must be repeated on the death (and likely also any capacity) of every trustee.

2. Limited Liability
The liability of a company is limited to its paid up capital - a properly structured SMSF special purpose trustee company will have an exposure of $2.

Individual trustees have unlimited liability, jointly and severally.

This can be particularly important if the SMSF owns real property given the inherent risks with that class of asset.

This reason on its own makes corporate trustees compelling.

3. Penalties
The administrative penalty regime generally applies at the trustee level.

Therefore, a single company trustee has one penalty imposed for each contravention.

An SMSF with (say) 3 individual trustees has triple the penalty - one imposed for each trustee.

4. Sole member funds
A sole member SMSF with a corporate trustee can have the one individual as both the sole member and the sole director.

A sole member SMSF with individual trustees must have 2 people appointed - thereby opening up many of the issues outlined above.

Furthermore, even if the SMSF starts as a 2-member fund, when one trustee dies it often forces the appointment of a corporate trustee – again, triggering many of the difficulties mentioned above. Arguably, the mantra 'begin with the end in mind' is relevant.

5. Administration ease
Title in the assets of the SMSF remains permanently in the name of the corporate trustee, regardless of how many changes to directorship (or indeed shareholding) are made.

In contrast, every admission or cessation of a member (not only on death) triggers the need to have a formal change of trusteeship - as well as the transfer of title to all assets of the SMSF.

6. Compliance
Generally, in terms of what the auditor (and ultimately the Tax Office) expects to see, the use of a special purpose corporate trustee more easily facilitates appropriate levels of record-keeping, overall governance and legislative compliance.

7. Perpetual existence
Companies have no ending date (unless specifically resolved to the contrary).

This fact is generally seen as allowing far greater certainty and ease of managing control of the SMSF as compared to individual trusteeship.

8. Control strategies
As a company acting as the trustee of an SMSF need only ensure all members are directors, there are a number of strategies available to otherwise regulate management and control of the company (and in turn the SMSF).

For example, there is complete autonomy on who the shareholders of the company are and how shareholder decisions are to be made.

The rights of the shares on issue can also be tailored to (for example) automatically end on the owners death or incapacity, ensuring control passes seamlessly and without the prospect of challenge under an estate plan.

9. Maximum numbers of trustees
The maximum number of individual trustees at law is 4.

For SMSFs considering larger numbers of members following the 2018 Federal Budget announcement of allowing 6 member funds they will need to have a company as trustee, as there are no similar limitations on the number of directors of a trustee company.

** for the trainspotters, name check to Hot Chocolate and their song 'Every 1s a Winner'.

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