When deciding whether an SMSF is right for your client, practitioners are faced with their first question – will an individual or corporate trustee structure be best for the client and their SMSF?
When setting up an SMSF, individuals must appoint either two or more individuals or a company to act as the trustee of their fund. The trustee structure the client chooses is critical for the long-term operation of their fund and will influence how their fund is administered and the cost of setting up and running their fund.
It’s important the practitioner helps the client choose the structure that best suits their needs and the needs of the other members in their fund.
Member and Trustee Requirements
Individual Trustee Structure
Under superannuation law, an individual trustee structure means you cannot have a single member fund; you must have at least 2 members and a maximum of 4 members. Generally, subject to certain exceptions, all members must be trustees of the fund and all trustees must be members of the fund.
Typically, an individual trustee structure will incur lower costs than a corporate trustee structure particularly with a number of online administrators offering “free SMSF set-up” to establish an SMSF with individual trustees. However, these cost savings are often negated by the potential fees and difficulty involved with adding or removing a member, the death of a member and when member’s circumstances change, which often outweigh the upfront cost savings. A prime example where a member’s circumstances change is often around succession planning, where a member is removed from the SMSF, for instance, death of a member or a marriage breakdown.
Corporate Trustee Structure
While establishing an SMSF with individuals as trustees may save the client a few dollars in the short term, the benefits of registering a corporate trustee for their SMSF far outweigh the short term savings. Here are the key reasons why we believe you should advise clients to use a corporate trustee.
5 Key Reasons to use a Corporate Trustee
Asset protection/ Separation of assets
Having a corporate trustee reduces the risk of personal assets becoming intermingled with SMSF assets. Companies have limited liability, where a corporate trustee provides greater protection if the trustee is sued for damages.
If the complex superannuation laws are breached, administrative penalties may be levied on each trustee. Therefore, the trustees would each be liable individually for penalties incurred. This is an obvious advantage for corporate trustee which in the event of non-compliance will be levied with one penalty as opposed to a penalty for each individual trustee.
Borrowing to purchase property
A corporate trustee is a must for both the SMSF trustee and bare trustee when purchasing property both for asset protection and also to satisfy the lenders borrowing criteria. In the current environment, many lenders will require a corporate trustee for the SMSF, and if allowed will limit the loan to value ratio for the loan for individual trustees.
Succession upon death
A company continues indefinitely in the event of a member’s death, ensuring control of the super fund is always certain. This is an especially important factor when a member of the fund dies or becomes permanently incapacitated.
Ownership of SMSF Assets
Registering ownership of assets can be simpler for a corporate trustee rather than individual trustee. Further, when a member of an SMSF resigns or ceases to be a member of an SMSF, no changes will need to be made with titles office or share registry whereas with an individual trustee, changes will need to be notified immediately.
Due to the influx of online SMSF providers offering “free SMSF set-up” and the lack of advice of the benefits of corporate trustee, according to the Australian Taxation Office; over 95 per cent of new SMSFs are established with an individual trustee rather than 5 per cent with corporate trustee. Further, 78 per cent of the more than 500,000 SMSFs had individual trustees at 30 June 2015. In my view, corporate trustee is always the best choice and more attention should be provided by the regulator on these bewildering statistics, particularly in light of the five key benefits highlighted above. Any accountants or advisors providing a recommendation of individual trustees should be made to justify this decision.
This trend can be seen to correlate with the increase of online providers in recent years which can include outsourcing accounting functions to foreign countries such as Sri Lanka or Vietnam to name a few. Effectively, many online providers focus on low cost SMSFs; however do not provide guidance or advice on the best structure based on a client’s individual situation.
SMSFs are all about strategy – a key component of SMSF strategy is the structure chosen. It is important to consider the benefits in the long term of a corporate trustee structure and not the set up cost of a company. As identified, the benefits of a corporate trustee structure over the long term clearly outweigh the short term cost savings of an individual trustee structure. For me – its corporate trustee 100 per cent of the time.
Ivan Filipovic, director, Redwood Advisory