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When establishing an SMSF, one of the first things to determine is who is going to be the trustee of the fund. Refer to “Who can be the trustee of an SMSF” for details of the rules on who can be the trustee.
One of the most common questions, however, is who should be the trustee? In determining whether a corporate trustee should be used, you will need to take many aspects of the fund into consideration.
Who are the members of your fund? What is the relationship between the members? Are the members likely to change often?
All assets of the fund are legally held in the name of the trustee. Therefore if you are using individual trustees and you change the members of your fund, then you need to change the title of all your fund’s assets to correct the name of the trustee (i.e. remove the name of the individual trustee who has left the fund and include the name of the new member).
By using a corporate trustee in this instance, it is relatively straight forward to remove and appoint new directors of the company with ASIC. The titles of all the fund’s assets remain in the name of the company, as trustee for the fund.
If you have a single member fund, using a corporate trustee gives you complete control over your superannuation assets – as you can be the sole director of the corporate trustee. If you chose to use individual trustees, you are required to include another individual as trustee.
What type of assets will the fund have? What is their value? In which state are they held?
If your SMSF is likely to hold land then a corporate trustee may be beneficial. Firstly, using a corporate trustee could minimise any land tax applicable. Most states have a higher rate of land tax the more land you own. If the members already own land together (for example a jointly owned rental property) then being individual trustees may result in a higher land tax bill for the fund’s land.
Secondly, if someone was to perform a titles search in your name, they would not identify the land held in the name of your SMSF, if a corporate trustee was used.
How important is asset protection? What other assets (non SMSF assets) are held by the members? Is the trustee at risk of being sued?
Consider a commercial property; if someone trips and injures themselves in the stairwell, can they sue the owner of the building? Do you have insurance to cover this? If not, what happens? Insolvency laws have the potential to not only wipe out the entire fund’s assets but may also result in claims against the trustees’ personal assets.
A corporate trustee has the benefits of limited liability – whereby the liability is limited to the company, which is generally a shell company only. Personal assets of the directors are unlikely to be exposed.
Is it likely that the fund will participate in the Limited Recourse Borrowing Arrangements (LRBA) recently made available to SMSFs?
If this is a potential transaction for the fund then it may be best to use a corporate trustee as many financiers will only enter these arrangements with SMSFs who have a corporate trustee. Limited liability was briefly mentioned above, however be aware that a director that incurs a debt in the name of the company without having a reasonable basis for its repayment can be subject to personal liability.
Record Keeping and Maintenance Costs
How particular are the members and their record keeping? Are the members comfortable in paying the costs associated in maintaining the company?
As mentioned above, all assets within the fund are legally held in the name of the trustee. If the trustees are individuals, it can get confusing when paying bills, writing cheques, using internet banking etc. If the wrong funds are used, it can jeopardise the tax status of the SMSF. What may have been a simple accident could have dire consequences as the expectations and obligations of trustees is paramount and ignorance is not a defence!
Having said that, the same confusion can be suffered if the company used as the corporate trustee has another function – for example if the company used also runs a business or has any other purposes. When considering a corporate trustee, it is highly recommended to set up a new company which will not have any other dealings and be completely separate to any other investments or transactions.
There are costs in establishing and registering a company and also maintaining that company – with annual fees payable to ASIC. If this new company does not perform any other function than its duties as trustee for your SMSF, this annual cost is reduced.
ASIC also require annual reports and forms for lodgement by specific deadlines. This compliance is certainly not overwhelming and by using The SMSF Accountant as your ASIC agent, we can ensure you are kept up to date with all compliance requirements.
What happens to decision making when a member dies or loses capacity?
By using a corporate trustee, a successor can immediately step in as director for a member who dies or is incapacitated. In contrast, the interests of that member may be entirely in the hands of the other member(s) of the fund – who could be an ex-spouse.
If individual trustees were used, costly paperwork is required to change individual trustees upon death or loss of capacity of an individual trustee. This is on top of considerable paperwork that is usually associated with administering a person’s estate and obtaining probate of their will.
Ultimately the decision on who to use as the trustee for your SMSF lies with the members. If you have decided to use a corporate trustee, whether for your existing SMSF or a new SMSF, then contact The SMSF Accountant for details on how to establish and register your new company.
You may also need to update your SMSF Deed to ensure it contains all the essential details on your new trustee. Contact The SMSF Accountant for assistance with this or for any further details.