Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 149

Why SMSFs should have a corporate trustee

Did you know that 78% of SMSFs are set up with individual trustees but that over 90% of professional advisers I have canvassed would always recommend a Sole Purpose Company trustee? In the haste to set up funds, most people miss this vital step with many having to pay high fees to change trustee later.

The issue is worsening as in the three years to 2015, there was a 4% decline in SMSFs registering with a corporate trustee. Of newly registered SMSFs in 2015, an incredible 95% had individual trustees (see: ATO Self-managed super fund statistical report – June 2015 appendix 1, table 6)

LS Table6

LS Table6

I believe it is essential to have a company as trustee and that the option to have individual trustees is short-sighted.

Benefits of a corporate trustee

A corporate trustee facilitates:

  • Time to grieve or adapt. The strongest reason from 10 years’ experience with SMSFs is respect for your spouse or family’s needs in times of grief. Do you really want to leave them an awkward and expensive set of tasks to carry out just to save $700?
  • Continuous succession. A company has an indefinite life span; it does not die. A corporate trustee can ensure control of an SMSF is more certain following the death or mental or physical incapacity of a member.
  • Administrative efficiency. When members are admitted to, or cease, membership of the SMSF, all that is required is that the person becomes, or ceases to be, a director of the corporate trustee. The corporate trustee does not change as a result. Therefore, title to all the assets of the SMSF remains in the name of the corporate trustee, especially useful when dealing with property in an SMSF.
  • Sole member SMSF. An SMSF can have one individual as both the sole member and the sole director. Likewise, if a spouse is incapacitated, then the husband or wife can act as director under an enduring Power of Attorney to run the fund on their own without the need for interference by others.
  • Meets lenders’ requirements. Most lenders require a corporate trustee in the SMSF as it is easier to deal with.
  • Higher Loan to Valuation Ratios accepted. With a corporate trustee, many lenders will go to 80% on residential loans and 70% on commercial real estate.
  • Greater asset protection. As companies are subject to limited liability, a corporate trustee will provide improved protection for the directors where a party sues the trustee for damages. I use an electrician as an example here when I discuss this with clients. If he is on your property and is electrocuted because of the owner’s (SMSF) negligence, then the SMSF may be sued but your own personal liability is limited to your shareholding and member balance rather than your entire wealth

Problems with individual trustees

Individual trustees cause issues with:

  • Paperwork at the worst time. Welcome to a nightmare. When a spouse has barely had time to start grieving, they need to manage the SMSF and administer pensions, investments and deeds. Minutes to record death of trustee, deed update to add a new trustee or move to a corporate trustee, off-market transfer forms and identity forms and probate forms to put every investment in correct name(s). Worse still, deal with the Land & Property Management agency or Office of State Revenue and their endless forms!
  • Complexities relating to death. If the SMSF has individual trustees, e.g. a husband and wife, then timely action must be taken on the death of a member to ensure the trustee and member rules are adhered to properly. For example, SMSF rules do not allow a sole individual trustee/member SMSF.
  • Extra and costly administration. To bring in a new member to an SMSF with individual trustees requires that person to become a trustee. As trust assets must be held in the names of the trustees, the title to all assets must be transferred to the new trustees.
  • Sole member SMSF. A sole member SMSF must have two individual trustees. Does a spouse need to rely on the children, possibly from the first marriage? That’s really not going to work as we know what a problem blended families are when it comes to estate planning.
  • Tighter lending rules. Lower LVRs are common, due to legal concerns, lenders restrict the maximum borrowing of an SMSF with individual trustees to 70% for residential properties and 55-60% for commercial real estate.
  • Less asset protection. If an individual trustee suffers any liability, the trustee’s personal assets may be exposed. The trustee as well as the SMSF may be sued by someone doing work for the SMSF.

What do the ATO and ASIC think?

The Australian Securities & Investments Commission (ASIC) and the Australian Taxation Office (ATO) prefer corporate trustees. Last year, ASIC released a number of documents which outlined the advantages of an SMSF corporate trustee.

More recently, the ATO released an article and video on SMSFs titled Choose individual trustees or a corporate trustee that objectively outlines the pros and cons.

And even more advantages of a corporate trustee

With a bit of preparation and planning, combining your will and enduring powers of attorney, minuted resolutions and if needed clauses written into the deed, a person (usually the Executor or Legal Personal Representative) can be immediately appointed as a director so that the fund can continue to operate in the event of death regardless of whether a death certificate or probate have been granted.

Likewise, a person who loses mental capacity needs to be replaced if they were individual trustees. With a company, the constitution can immediately have a mechanism which allows the person holding the enduring power of attorney to be appointed as a replacement director, resigning the incapacitated director at the same time.

Under ASIC’s new administrative penalties, if a fine is made in relation to an SMSF that has individual trustees, then each trustee will be fined in their personal capacity. The fine is personally payable and cannot be reimbursed by the fund. Only one fine is payable by a corporate trustee.

It is also easy for Superannuation Industry Supervision (SIS) regulation 4.09A(2)(a) to be contravened by an individual trustee. It says:

“A trustee of a regulated superannuation fund that is a self-managed superannuation fund must keep the money and other assets of the fund separate from any money and assets, respectively: … (a) that are held by the trustee personally …”

For example, if individual trustees receive rental property income or a dividend into a personal account in their own names instead of an account in their personal names but with the account designation of their SMSF, it is a contravention. With a corporate trustee, it’s far less likely to mix fund assets with personal assets.

Summary

It’s difficult to believe that 90% of SMSFs are currently being established with individual trustees. Even if some costs of registering a company are initially avoided, the trustees are almost certainly inviting complications later in the life of the SMSF.

 

Liam Shorte is a specialist SMSF advisor and Director of Verante Financial Planning. This article contains general information only and does not address the circumstances of any individual. Professional personal financial advice should be sought before taking action.

6 Comments
Jonathan Hoyle
April 03, 2016

Well argued, Liam. A Corporate Trustee is nearly always the preferable option.

Randall Kingsley
April 01, 2016

Thanks for quite a good article, even if I disagree with the notion. Might be a tad aspirational but we have opted to have the maximum allowed four trustees in our smsf-two in retirement now and two in the 30s and building their super. Our hope is that our smsf will become almost perpetual and as hand the running off to the next generations. Almost like the now defunct idea put forward by our poor PM who is trying to get our leaders to take on more financial responsibilities. And after 12 years or so we are working well, I only wish we were allowed more trustees!

Liam Shorte
April 02, 2016

Randall, there are always exceptions to a rule. Hopefully your family will continue to benefit from your obvious good guidance to take super serious from an early age.

Wife about to win an argument..again!
April 01, 2016

Thank you, thank you, thank you. I have been arguing with my husband about this for a few years now and this is the best laid out set of reasons for moving to a corporate trustee I have seen. I am sure that my beloved hubby is just delaying because he is miserly and thinks he will pass away first and I can deal with the paperwork...like I do for everything else in our business.

Liam Shorte
April 02, 2016

Glad I could help you. Remember you can get a discount on the annual ASIC review fee for the Corporate trustee by paying up to ten years in advance at today's rate.

SMSF admin
March 31, 2016

These numbers are a mystery. I spoke to a few online providers and they say the stats don’t reflect their business which is about 80% corporate trustee. Everyone is perplexed about who is actually opening those individual trustee funds.

 

Leave a Comment:

     

RELATED ARTICLES

SMSFs and the control over estate planning

Importance of updating your SMSF Trust Deed

Every SMSF trustee should have an Enduring Power of Attorney

banner

Most viewed in recent weeks

10 reasons wealthy homeowners shouldn't receive welfare

The RBA Governor says rising house prices are due to "the design of our taxation and social security systems". The OECD says "the prolonged boom in house prices has inflated the wealth of many pensioners without impacting their pension eligibility." What's your view?

House prices surge but falls are common and coming

We tend to forget that house prices often fall. Direct lending controls are more effective than rate rises because macroprudential limits affect the volume of money for housing leaving business rates untouched.

Survey responses on pension eligibility for wealthy homeowners

The survey drew a fantastic 2,000 responses with over 1,000 comments and polar opposite views on what is good policy. Do most people believe the home should be in the age pension asset test, and what do they say?

100 Aussies: five charts on who earns, pays and owns

Any policy decision needs to recognise who is affected by a change. It pays to check the data on who pays taxes, who owns assets and who earns the income to ensure an equitable and efficient outcome.

Three good comments from the pension asset test article

With articles on the pensions assets test read about 40,000 times, 3,500 survey responses and thousands of comments, there was a lot of great reader participation. A few comments added extra insights.

The sorry saga of housing affordability and ownership

It is hard to think of any area of widespread public concern where the same policies have been pursued for so long, in the face of such incontrovertible evidence that they have failed to achieve their objectives.

Latest Updates

Strategy

$1 billion and counting: how consultants maximise fees

Despite cutbacks in public service staff, we are spending over a billion dollars a year with five consulting firms. There is little public scrutiny on the value for money. How do consultants decide what to charge?

Investment strategies

Two strong themes and companies that will benefit

There are reason to believe inflation will stay under control, and although we may see a slowing in the global economy, two companies will benefit from the themes of 'Stable Compounders' and 'Structural Winners'.

Financial planning

Reducing the $5,300 upfront cost of financial advice

Many financial advisers have left the industry because it costs more to produce advice than is charged as an up-front fee. Advisers are valued by those who use them while the unadvised don’t see the need to pay.

Investment strategies

Slowing global trade not the threat investors fear

Investors ask whether global supply chains were stretched too far and too complex, and following COVID, is globalisation dead? New research suggests the impact on investment returns will not be as great as feared.

Strategy

Many people misunderstand what life expectancy means

Life expectancy numbers are often interpreted as the likely maximum age of a person but that is incorrect. Here are three reasons why the odds are in favor of people outliving life expectancy estimates.

Investment strategies

Wealth doesn’t equal wisdom for 'sophisticated' investors

'Sophisticated investors' can be offered securities without the usual disclosure requirements given to everyday investors, but far more people now qualify than was ever intended. Many are far from sophisticated.

Investment strategies

Is the golden era for active fund managers ending?

Most active fund managers are the beneficiaries of a confluence of favourable events. As future strong returns look challenging, passive is rising and new investors do their own thing, a golden age may be closing.

Sponsors

Alliances

© 2021 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.