The superannuation law requires that every superannuation fund has a trustee who must also be a fund member in most cases. If the fund is a self-managed superannuation fund (SMSF) the trustee can be made up of individuals or it can be a corporate trustee (company). The best time to decide which structure is best is when the SMSF is being established or a change of trustee can take place at a later time if required. (Individual Trustee vs Corporate Trustee : What is the difference?)
In deciding whether the SMSF should have individual trustees or a corporate trustee the ultimate decision will take into consideration the efficiency of fund administrative, legal liability, asset protection, succession planning and cost. Because the fund trustee is equally responsible and liable for managing the fund, the individual trustees or directors of the corporate trustee need to be comfortable sharing their responsibilities. It is possible for a corporate trustee to have a sole director with full control over the fund. However, a fund with individual trustees and just one member is required to have at least two individual trustees. For this reason, there may be some benefits for a single member fund to have a corporate trustee.
Some of the issues to consider when deciding to have individual trustees or a corporate trustee are:
• Administration efficiencies
• Legal liability and asset protection
• Perpetual succession and estate planning, and
• Cost considerations
All assets of an SMSF must be held in the name of the trustees as trustee for the SMSF, for example, ‘Jack and Jill Hill ATF the Jack and Jill Superannuation Fund’. For a fund with individual trustees, the fund’s investments are held in the name of all the individuals as trustees for the SMSF. For a corporate trustee, the assets are held in the name of the company as trustee for the SMSF.
If the fund has individual trustees, a change in just one trustee may be costly and time-consuming as the ownership details of all the fund’s assets must also be changed every time there is a change in individual trustees. Where the SMSF holds numerous parcels of shares with different registries or stock brokers the change may require significant effort. A fund that owns real estate may incur costs to register the change of trustee with the State land titles office. Also, changing the trustee names on bank accounts may require that the account is closed and a new account established in the name of the new trustees. Any change of bank account details may require notifying investment institutions with any changes in direct debit or credit instructions.
All members of an SMSF are required to be a trustee or a director of a corporate trustee in most cases. If a new member joins or leaves the SMSF, the trustees or directors of the trustee company will usually change. Membership changes can occur upon marriage, divorce, death and when children become fund members. The change of trustee must be authorised under the fund’s trust deed and the ATO notified within 28 days.
If the SMSF has a corporate trustee the company will remain as trustee even where there is a change in the directors. The reason is that the fund’s assets are owned by the company as trustee of the SMSF.
The superannuation legislation requires there must be a clear distinction between assets owned by the fund and those owned by the individual trustees and fund members. Because the law only recognises the ownership of property and other assets in the name of the trustee then a declaration of trust must be made over assets held by individual trustees in the name of the SMSF. Use of a separate corporate trustee helps solve this problem as the assets are held in the name of a separate company.
Trustees are liable individually as well as jointly with the other trustees and are wholly responsible for any legal action taken against the fund. This has the potential to place the individual trustees’ personal assets at risk to legal challenge.
A corporate trustee provides limited liability for the directors and shareholders of the company. It ensures litigation against the trustee of the SMSF is generally limited to the assets held in the name of the corporate trustee. Liability does not extend personally to the directors of the company except where they are fraudulent in their duties.
An SMSF with an individual trustee structure cannot legally operate with less than two trustees (as there is no longer a trust arrangement). In the event of an individual trustee’s death which will leave one individual trustee remaining, another individual trustee must be appointed. On appointment of the new trustee legal title of all SMSF assets must be updated to reflect the change of trustees. This can be costly, time-consuming and delay the payment of benefits.
Where a director of the SMSF’s corporate trustee passes away, the corporate trustee continues and a new director may be appointed to administer the fund.
Under the ATO’s administrative penalties regime, the ATO can impose fines on trustees for breaches of superannuation legislation. If an administrative penalty is imposed for a breach the trustee is personally liable to pay the penalty and not the SMSF. As the penalties apply per trustee it means that an SMSF with four individual trustees, for example, will each be liable to pay the penalty (four times the penalty) compared to the same SMSF with a corporate trustee which will be liable for just one penalty.
There are additional costs in establishing a corporate trustee. There is an upfront establishment cost of $990 and an annual ASIC levy of $63 for the corporate trustee. A corporate trustee of an SMSF may be registered with ASIC as a special purpose SMSF trustee company which has restrictions placed on its operations such as being prohibited from trading. Because of these restrictions the special purpose company has reduced ASIC annual filing fees and is not required to prepare or lodge financial statements or an annual income tax return.
In comparison to a corporate trustee, as an individual trustee structure does not require another legal entity to be established, there are establishment costs such as a company or annual ASIC levy.
Members will need to consider the additional upfront costs of establishing a corporate trustee versus the additional cost that will be incurred if the trustee converts from individual toa corporate trustee in future.