David Busoli, principal of SMSF Alliance, said anecdotal evidence suggests funds established by financial planners usually have a corporate trustee, while most funds established by trustees directly, or via their accountant, tend to have individual trustees.
He said that new SMSFs are often deterred from using a corporate structure due to the additional financial costs involved and higher ongoing fees, but he noted that these could be discounted by 80 per cent for a special-purpose corporate trustee.
“A special-purpose corporate trustee is effective in separating ownership from personal and business assets. Quite apart from the regulator’s requirement that such a separation be maintained, this is also useful if the members, or their businesses, become bankrupt or have a receiver appointed,” Busoli said.
“There have been instances where fund assets, particularly property, have been inadvertently used to secure business or personal financial arrangements resulting in not only their loss to the fund but further penalties from the regulator as well.”
He added that even if no encumbrance is in place, it can take some time to convince a receiver that property held in an individual’s name is held in trust for the fund.
“If the fund intends to enter a limited recourse borrowing from a financial institution, it is often the case that the institution will lend a higher amount and/or charge a lower interest rate if the fund has a corporate trustee,” he said.
“Many will require a corporate trustee as mandatory.”
Furthermore, Busoli said, if a major mishap occurs within the fund, such as a person being badly injured on the site of the fund’s property that results in a damages claim that depletes the fund’s assets, it is more likely the claimant can successfully continue the claim against individual trustees in their personal capacity than against them as directors of a corporate trustee.
Another difference between the two structures relates to the way in which new fund members can be added to, or existing members exited from, an SMSF, he said.
“During the life cycle of an SMSF, new members may join and existing members leave the fund or become deceased. For an individual trustee fund, this will necessitate changing the title of each investment and altering the trust deed to reflect the new trustee situation. It can be quite difficult to change the title for direct real estate,” Busoli said.
He added that most other assets are easier and, as most fund members comprise only a husband and wife, the process of considering trustee options can be traumatic for the survivor when a spouse dies.
“However, with a corporate trustee, the trustee remains the same. All that is required is a notification of the altered trustee situation to ASIC even if there is only one director remaining,” he said.
“A single-member fund must have two individual trustees. For a corporate trustee, the single member can be the only director and enjoy sole control. There is no need for a second, non-member director, though one can be included if the member wishes.”
Another major difference in a corporate versus individual trustee fund concerns voting powers, Busoli said.
“Trustee voting powers can vary from fund to fund depending on the powers in the deed; however, if a dispute occurs between trustees, individual trustee funds may have a problem as individual trustee decisions must generally be unanimous,” he said.
“There is some dispute as to whether special deed powers conferring greater voting rights on some individuals and the ability for majority decisions to be valid will stand up to a challenge.”
For a corporate trustee fund, however, the decisions can be carried by a majority, and in addition, the shares in a corporate trustee can have different voting rights and ownership that can have advantageous estate planning ramifications.
While there are pros and cons to each type of structure, Busoli said that another of the major benefits of a corporate trustee fund is its advantage in managing the SMSF penalty regime.
“Penalties can be as high as $18,780 for many common infringements such as lending to members or in-house asset breaches,” he said.
“These will be applied per individual trustee or per corporate trustee. This will result in the trustees of a four-member fund being fined four times more ($75,120) than if they were, collectively, directors of a corporate trustee ($18,780). Such fines must be paid by the individuals concerned. They cannot be paid or reimbursed by the SMSF.”
