Thinking about setting up a self-managed super fund?
When establishing a self-managed superannuation fund (SMSF) a decision must be made as to what trustee type to use. There are two options, appoint
- a company; or
Sometimes, in the initial stages, this choice is a matter of cost, as additional fees apply when a company is also established. In other cases, as there is only one member who wants total control, only a company can be used and still meet compliance requirements. Neither option is final, and as things change, so can the trusteeship of a fund.
While neither is more ‘correct’, if asked, we would generally recommend a corporate trustee for a variety of reasons, not least asset protection and ease of continuity.
Different trustee options for SMSF
Below is a discussion of some important differences between the options.
Continuity of Ownership
Where a fund has individual trustees, whenever a change in membership occurs, a change in trusteeship is generally also required.
As the law strongly recommends the assets of a fund are held in the names of all of the trustees of the Fund, each change of trustee requires an update to the title to assets. This means, each time a new trustee is appointed to the Fund, or an existing trustee leaves the Fund, the Fund is required to notify all relevant registries and offices (and provide a range of documents) to change the name under which the assets of the SMSF are registered.
Furthermore, legal advice as to the procedures to remove/appoint the trustee and member, as determined by the Fund’s trust deed, and the preparation of the necessary documentation must also be undertaken each time, incurring costs at each change.
In contrast, a company is an indefinitely continuing entity. When a new member joins an SMSF with a corporate trustee, the corporate trustee itself does not change, only the underlying directorship of the company changes. The assets continue to be held in the same name – that is, the name of the company – so there is no need to change the name in which the assets of the Fund are held.
Individuals acting as trustees of an SMSF are jointly and severally liable for any actions taken against the Fund, as they hold the assets of the Fund in their individual names. Should litigation against the Fund exceed the assets held in the name of the trustees (i.e. as trustees for the Fund), the personal assets of the individuals may become at risk.
Companies, on the other hand, have limited liability. This generally ensures litigation against the Fund is limited:
- firstly, to the assets held in the SMSF; and
- secondly, to the assets held in the name of the company itself.
Liability generally does not extend to the directors of the company. If the company is a sole purpose SMSF trustee company, this will generally ensure any claim against the Fund is limited to the assets held by the company as trustee for the SMSF, with no director’s assets at risk.
The Australian Taxation Office (ATO) may apply monetary penalties to trustees of SMSFs in the event of certain breaches of the Superannuation Industry (Supervision) Act (SIS Act).
If an SMSF has individual trustees, each individual would be liable to pay any ‘administrative penalty‘ levied. That is, one fine per person. Alternatively, if the SMSF has a corporate trustee, the penalty is levied on the company, and while each director is jointly and severally liable to pay that penalty, only one fine is applied.
Maintenance of Control
A majority of SMSFs have two members and thus two trustees.
Having a company as trustee for the Fund ensures the trustee status of the SMSF is always certain, and the members in the fund are able to maintain control even when one dies.
If an SMSF with individual trustees becomes a sole member fund, generally on the death of one member, the SIS Act requires that the SMSF have a second individual trustee appointed. This will mean that the sole remaining member will have to relinquish some control over the Fund to another person.
It is important to note that there can be only two individual trustees for a sole member fund. If the second trustee were to be an adult child, only one child of the remaining member can be selected, and should the remaining member die, that sole child would control the SMSF in the first instance. If there was no binding death benefit nomination in place, that child would also control the recipient and timing of death benefit payments from the fund.
Alternatively, the SIS Act provides that a sole member SMSF can have a company as a trustee with either one or two directors, one of which must generally be the member. In this case, the surviving sole member can assume total control over the SMSF as the sole director of the corporate trustee. On their death, control generally passes to the executors of their estate.
While the change to a corporate trustee can be done within the first 6 months after the death of a member, where a company is already in place, all that is required for SMSF compliance is the lodgement of notice of death to ASIC and the ATO.
Other SMSF Considerations on establishment
There is a cost involved in the establishment of a new company and an ongoing annual fee to ASIC to maintain its registration. This is an additional expense to the fund and does not apply when individual trustees are in place. The annual ASIC fee, from 1 July 2021, is $56, with this fee increasing each year by approximately $1 – $2. This fee is GST free and will apply from the first anniversary of the company establishment.
For existing funds, there is an additional cost for the legal documentation required to change a fund trustee and update the governing bodies.
In addition, where there is a change in trustee, the title to all fund assets must be updated to the new trustee, which requires a trustee’s time and effort and can result in a change to bank accounts. Further, should the fund own property, there are additional legal costs to prepare the necessary documents and register a change of title docs with the relevant Titles Office/Office of State Revenue.
Please note, when changing the trustee of an existing SMSF, the ATO removes the fund from Super Fund Lookup for a short period while ATO review processes are being conducted. During this time, rollovers can be delayed, contributions may not be accepted and updating the asset titles could be difficult.
A special purpose trustee company is prohibited from doing anything other than acting as trustee of an SMSF. It cannot act as trustee for any other trust, own assets in its own right, or pay dividends of any kind.
Rather than a special purpose newly established company, an existing company can act as trustee of an SMSF. Difficulties, both financial and compliance-related, can arise if this entity or another trust it controls is sued, or for business reasons other individuals need to be appointed as directors of that company. Many safeguards provided by a special purpose company do not apply when a pre-existing active company is appointed as trustee.
If you would like to discuss the existing structure of your SMSF, or are considering establishing an SMSF and want more information, please contact Malcolm Barkle on 07 3210 5500.
GENERAL ADVICE WARNING
This content has been prepared to provide you with general information only and has not taken into account your personal objectives, financial situation or needs. It does not contain and it is not to be taken to contain Personal Financial Advice. Before making any financial or investment decisions, you should seek advice from an appropriately licenced or authorised financial advisor.
The content was prepared by UHY Haines Norton. AFS Licence No. 483056