When setting up a self-managed superannuation fund, one of the key decisions that you will grapple with is whether to set up as a corporate trustee or as an individual trustee.
For a long time, people have gone for the individual trustee option but this is increasingly becoming a poor choice. Corporate trustees offer certain strengths that make them a logical choice for many Aussies. Currently, the majority, 57%, of the self managed superannuation funds (SMSFs) in Australia have corporate trustees.
Corporate trustees are a superior option even if for the past decades, they were the less preferred of the two options. Now the incentive to use a corporate trustee is more obvious to most people. Let us look at some of the strong points of using a company as a trustee:-
Perhaps the biggest imperative for choosing the corporate trustee route is that unlike an individual, a company cannot die. In terms of succession and longevity, a corporate trustee offers a better and superior continuous succession for an SMSF fund.
In matters succession, an individual trustee offers a very weak option. In case the individual trustee dies or changes, there is so much administrative nightmare that the SMSF has to grapple with such as updating the ownership documents and other succession issues. If there is real estate involved, the trustee will have to prove to the Australian Taxation Office that there are no due duties to be paid due to a change of trustee. All this will spell substantial paperwork and costs for the succession process.
Adding new trustee roles
Adding a new person to the trustee role is generally less work-intensive in corporate trustees than in individual trustees. In the case of an individual trustee, adding a new person to the trustee role usually means changing the trustee and this can involve quite a bit of paperwork and procedure. However, for corporate trustees, onboarding new directors to the company will not technically alter the trustee role since in this case, the company is the trustee. In corporate trustees, adding new directors to the company will be less troublesome than in individual trustees where you have to go through a cumbersome process.
Corporate Trusteeship Means Smoother SMSF Compliance
With a corporate trusteeship, it is much easier for a fund to stay within the requirements for an SMSF. Broadly, this will help the fund to comply with the ATO requirements and be in the good books of the Tax Office.
An individual trustee managed fund can run into a compliance nightmare if one of the individual trustees dies as the fund will no longer be able to remain as an SMSF with only one member and one trustee. On the other hand, a corporate trustee with only a single director and which is in charge of a single member fund is still able to meet the legal definition of an SMSF.
Greater Asset Protection for an SMSF at Risk
A sole-purpose corporate trustee can provide an SMSF at risk or one that is in debt with a better asset protection than an individual trustee. A corporate trustee is a separate legal entity so it provides a buffer between the individual and the assets in the SMSF. In the case of an individual trustee, the personal assets are generally at stake in case they are sued and the SMSF assets are not sufficient to cover their liabilities. In this regard, a corporate trustee can assure an SMSF of better legal protection in case of any eventualities.
Corporate Trustees and the ATO Residency Rules for SMSFs
The ATO imposes highly technical residency rules that all SMSFs must adhere to. Those that fail to adhere are considered “non-complying” and face tough penalties that end up wiping away your superannuation balance. Broadly, these rules require a self managed superannuation fund to satisfy the “Australian Superannuation Fund” definition for it to retain its generous tax concessions and avoid paying taxes at the punitive marginal tax rates. A corporate trustee can easily satisfy technical residency rules than an individual trustee. With the technical rules, it is much easier to show that the central management and the control of the corporate trustee is in Australia.
Minimize Administrative Penalties
If an SMSF is in contravention of some superannuation rules, the ATO will impose certain SMSF administrative penalties on each of the trustees. With the corporate trustees for SMSF, the directors of the trustee will be jointly and severally liable for the ATO penalties. Since there is only one trustee, the sole corporate trustee will incur only a single fine.
In the case of individual trustees, the trustee members are each liable for a penalty. In this case, there is the potential of multiple fines levied on each of the trustees. A corporate trustee can therefore minimize the burden of SMSF administrative penalties. It simply means one head will be on the chopping block in a corporate trustee as opposed to an individual trustee where several heads will be on the chopping block if the SMSF contravenes some rules.
Separation of assets
One of the most common contraventions of superannuation rules occurs on the legal requirement for the “separation of assets”. According to the law, a trustee must separate its money or assets from the money and assets that are “held by the trustee personally”. Failure to adhere to the separation of assets will result in the fund being non-compliant.
However, in individual trustees, there is a higher risk of the accidental intermingling between the personal assets and the SMSF assets.
A sole-purpose corporate trustee can be advantageous in this regard. Due to the separation of entities, a corporate trustee is less likely to be in contravention of this law. The corporate trustee will only have the SMSF money and not any personal money and so the there is a clear demarcation between personal and trustee money and assets. The same does not obtain for individual trustees where personal money often mingles with the SMSF money.
Limited recourse borrowing
Banks will generally insist on a corporate trustee where an SMSF resorts to a limited recourse borrowing from the bank. Individual trustees face an obstacle in this regard.
Individual trustees are everything corporate trustees aren’t. In spite of this, they still the most popular mode for SMSF administration. Here is a look at some of the advantages of individual trustees:-
Ease of Administration
Generally, an individual trustee is very easy to administer on a day-to-day basis. Complexities only occur if there one of the trustees dies or if there is a change of trustees. Then, you will have to go through a very complex succession process with lots of paperwork. Corporate trustees are more complex to administer.
Ease of set up
An individual trustee is very easy to set up with low setup fees. Since you don’t have to set up a company that will act like a trustee, the setup arrangements are generally less costly.
Individual trustees generally incur lower ongoing costs. They don’t have to grapple with ASIC fees at the time of establishment of the company and ongoing annual review fees like corporate trustees. An SMSF that is implementing a sole purpose corporate trustee will have to grapple with a concessional annual ASIC fee.
Individual trustees for SMSFs face less red tape. For example, they don’t have to complete ASIC forms in case there is a change in the fund or the membership and they also don’t have to be subjected to annual ASIC reviews like corporate trustees.
Corporate trustees face further red tape in their operations. They have to adhere to the company’s constitution along with the requirements of the trust deed. Individual trustees also have to adhere to the dictates of their trust deeds but they have less procedural bottlenecks. The company advisors and directors must be keenly aware of many of these special requirements so as to ensure that the SMSF is fully compliant.
Can You Change the Trustee Structure?
The trustee structure can be changed from individual to corporate and vice versa although to accomplish that, you will have to amend the trust deed. The change must also be reported to the Australian Taxation Office and all the assets transferred to the name of the new trustee. Need guidance in deciding the trustee structure that will be most suitable for your SMSF? Talk to an accountant Melbourne professional for assistance and for the efficient administration of your self-managed superannuation fund (SMSF).