With the expansion of the maximum number of members permitted in an SMSF from four to six members, we are receiving questions about the best way to accommodate adding these extra members. Now could be the time to consider changing to a corporate trustee.
From a legislative viewpoint there is no preference, however, there are practical issues to consider in deciding on a preferred structure.
Under the Superannuation Industry (Supervision) (SIS) legislation, an SMSF must either have a company act as trustee of the fund or a group of individuals. A single-member fund must appoint a second individual trustee to comply with the SIS legislation and control and responsibility will be shared equally by both. A corporate trustee can have a sole director, therefore allowing a single member full control over the management of the fund.
In addition, each member of the SMSF must be a trustee of the fund, or where the trustee of the SMSF is a company, each member must be a director of the company.
Some important considerations include:
Administrative considerations
All assets of an SMSF must be held in the name of the trustees. Under the corporate trustee structure, all assets of a fund are held in the corporate trustee company and in the case of individual trustees, all fund assets are held in the name of the individuals.
This means the names on the titles of every asset must be changed each time a member enters or leaves an individual structure. Changing the titles for every single asset owned by the fund can be a costly and time-consuming process.
Trustee penalties
The ATO has a range of options available to deter and address instances of non-compliance, including penalties. Where the fund has a corporate trustee, all directors are jointly and severally liable to pay the total penalty amount. Where the fund has individual trustees, each trustee will be individually liable to pay the penalty amount. For example, a fund that has four members in an individual trustee structure will pay four times the amount than a corporate trustee structure with four directors.
Asset protection
As a corporate trustee company is subject to limited liability, this may provide greater protection of personal assets. The case of Shail Superannuation Fund and the Commissioner of Taxation [2011] AATA 940 involved a husband and wife acting as individual trustees. The couple separated and the husband illegally withdrew almost $3.5 million from their SMSF and left the country. The ATO fined the trustees of the fund around $1.6 million. With only the wife left as the remaining trustee in Australia, she was held personally liable for payment of the fine. While a corporate trustee structure may not necessarily provide protection from penalties, it may limit the ability of regulators to pursue the directors in a personal capacity.
Succession planning
A company has an indefinite lifespan so a fund with a corporate trustee can more easily be passed down from one generation to another. Having a corporate trustee also allows for a smoother and simpler transition when a member dies. A corporate trustee can continue with a single director, whereas an individual trustee fund must replace deceased trustees.
Cost considerations
Corporate structures are subject to establishment fees, including company set-up costs and a small annual ASIC levy.
Trustees need to consider the additional upfront cost of establishing a corporate trustee, but be mindful of the additional costs incurred in the case of trustee changes for individual trustee and succession planning later down the track.
The superannuation law does not preclude using an existing company, however, generally only members of the SMSF are permitted to be trustees, which may not suit the requirements existing company activities.
Conclusion
Single-member SMSF – The cleanest approach is to have a single director company as the trustee so no other parties are involved.
Two-member SMSF – Either an individual or corporate trustee structure works, and the decision hinges on cost considerations. For example, a preference toward a corporate trustee would exist if the SMSF had real property as one of its investments.
Three, four, five or six-member SMSFs – Depending on the state in which you reside, legally either trustee structure is suitable, but a corporate trustee makes some aspects simpler if the multi-member fund ends up splitting.
Philip La Greca is SMSF technical and strategic services executive manager at SuperConcepts.
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