Individual vs Corporate Trustee…
Fantastic, what’s next?
Before you can setup your SMSF you first need to decide on the type of trustee for your fund.
Every super fund requires a trustee who is given control or power of administration of the fund. This may be individuals or a corporate (company) trustee. Under the super rules, each member of the fund generally must be and individual trustee, or a director of the corporate trustee.
So which type of trustee will suit you best?
Below we will discuss the pros and cons of each option and how your decision may impact you throughout the life of your fund.
If you are on a serious budget, then running your fund with individual trustees is the cheapest option available, as the only cost is for the establishment of the fund itself.
With a Corporate trustee you have the additional cost of incorporating a company and the ongoing annual ASIC fee.
It’s worth noting however that if you are using a Sole Purpose Trustee company (where the company’s constitution prohibits the distribution of income or assets to shareholders), you may be entitled to a concessional company annual review fees.
One of the first things you will notice when setting up your new fund is the importance of your fund name. You will be writing it down a lot during the initial purchase and setup of fund assets such as your bank account, or on the contact for the purchase of a property. The difference between getting this step right and wrong can result in a compliance breach under the super rules.
I often recommend to clients who wish to avoid ‘dead wrist’, keep you name short and simple. Why? Simply because the title on all the fund’s assets must be held in the name of all the trustees.
Let’s say Fred and Wilma wants to set up a new fund, the Flintstone Super Fund.
If they use individual trustees, the name on all assets should be:
– Fred Flintstone and Wilma Flintstone ATF Flintstone Super Fund
If they used corporate trustee, the name on all assets should be:
– Example Pty Ltd ATF Flintstone Super Fund
Okay great, not that hard right?
Such is life that things change. In the event that a new members were introduced to the fund, or even if a member of the fund wanted to or had to leave, with individual trustees all assets need to be changed to reflect the new trustees.
Let’s take the above example, but Barney and Betty decided to join the fund 4 years down the track..
With individual trustees, all assets will need to be changed to the new trustees, being:
– Fred Flintstone and Wilma Flintstone and Barney Rubble and Betty Rubble ATF Flintstone Super Fund
Any changes in membership (marriage, divorce, death or adding children to the SMSF) would require a change to the names registered on the title of assets when there are individual trustees.
With a corporate trustee, the name of all assets will remain the same, as Barney and Betty can simply be added a directors of the corporate trustee.
As you can see, the Corporate Trustee is a big winner in this area.
Some states, such as NSW do not allow the fund designation to be added on the property title. In this case, when a title search is conducted by the auditor at 30 June each year, only the trustee will be noted.
A key trust and super law requirement is to keep your super fund’s money and other assets separate from any personal or business assets. By using a sole purpose Trustee Company, this will assist in keeping a clear divide in what belongs to you, and what belongs to the super fund.
Borrowing in Super
Thinking of borrowing in your superfund to buy an investment property or another asset? The majority of bank lenders generally insist (or at least prefer) that your SMSF has a corporate trustee.
One of the benefits or a corporate trustee is that it is subject to limited liability which means the individual directors of the company will not suffer personal liability (except in exceptional circumstances).
An individual who acts as trustee exposes their personal assets to claims and court orders should they incur any liability as trustee of an SMSF. If the individual’s right of indemnity against the SMSF is not sufficient to discharge the liability, then the individual will be personally liable for the shortfall.
Number of Members
Generally, the super rules require that you must have more than one individual trustee, therefore if you are thinking about setting up a fund with just yourself as the sole member, then you will be required to have another person who is willing to act as trustee in the fund alongside you.
When using a corporate structure to act as trustee, you are permitted to have just yourself as a single member of the fund and director of the trustee company.
While the intention of the majority of SMSF trustees is to do the right thing, at some point it may come to your attention that you have breached the superannuation rules.
With Individual trustees, if the super laws are breached, administrative penalties are levied on each trustee. Conversely, with a corporate trustee, administrative penalties are generally levied on the company alone.
Fred Flintstone and Wilma Flintstone forgot to prepare financial accounts and statements.
With Individual trustees, both Feed and Wilma could be liable for a $1,800 penalty each ($3,600 total).
With a Corporate trustee, the company could be liable for a $1,800 penalty only.
If your SMSF has a corporate trustee, the control of the fund can continue even after the death of a member or director. Where the fund has one or two individual trustees, an addition replacement trustee must be appointed on the death of one of the members. Failure to do so may result in the fund becoming non-compliant.
Which type of trustee will suit you best?
While there is a clear ‘cost benefit’ of running your fund with individual trustees, on face value the benefits for a corporate trustee are too great to ignore.
Either way, it is always a good idea to discuss your individual circumstances with a SMSF Specialist Adviser, as making the wrong decision now may cost you a lot more in the long run.
The next step…
To set-up or transfer your existing fund to smsf options, or to find out more about Self Managed Super, please contact us here.
We will be happy to arrange a free initial meeting with you to gain a deeper understanding of your requirements.