Individual trustee or corporate trustee for your SMSF. Which one should you choose?
One of the most common questions we get asked by clients is whether it’s better to establish a self- managed super fund (SMSF) with a company as trustee (corporate trustee) or with individuals (members) as trustees.
The answer is, it depends. Having said that, there are very few scenarios where an individual trustee would be more beneficial than a corporate trustee.
Whilst most professional accountants and advisers will recommend a corporate trustee, in 2015, 95% of SMSFs were established with individual trustees.
We have identified 7 benefits of corporate trustees in the hopes of illustrating why a corporate trustee is the most advantageous structure in the long run.
Why you should choose a corporate trustee for your SMSF
1. Greater asset protection
This is perhaps the most important point. What you need to understand is that he trustee of an SMSF is the legal owner of all the fund’s assets. So if you had individual trustees, each member of the fund would hold the legal ownership of the SMSF property, which means that each member is liable for any action taken against the fund. Therefore should action be taken against the fund and the claim exceeds the fund’s assets, the individual members asses held in their personal assets could be a risk.
A corporate trustee will provide individual members with peace of mind, knowing that liability will be limited to the company and the director’s (members) personal assets will not be exposed.
Consider the following scenario:
An SMSF currently has two members, husband and wife named Terry and Anne, and they are both individual trustees. The fund had purchased a property and unfortunately their tenant slipped and fell, injuring themselves with insurance not covering the cost. The tenant therefore goes after the fund claiming $300,000 however the fund only has net assets of $120,000.
In this situation, the fund’s assets are not enough to pay the whole debt. Of importance is that Terry and Anne currently own their primary residence in their personal names which is worth $750,000. In this situation, Terry and Anne, as individual trustees who are personally liable for all debts incurred by the fund, may be forced to sell their house to raise the shortfall of $180,000.
This is what is meant by personal liability. Any money or asset which Terry or Anne own personally (car, bank account or property) regardless that it is not connected in any way to the super fund, can be used to settle the debt.
Compare the outcome to a situation where Terry and Anne implemented a corporate trustee where they were directors. The party that sued the fund would only be entitled to the fund’s assets of $120,000 which would held by the corporate trustee and would not be able to try and access Terry and Anne’s primary residence. This is because their legal action is against the company who was the SMSF’s trustee.
This example shows the potential ramifications of using an individual trustee, and is a big reason why we recommend corporate trustees as someone cannot sue you personally as a director of the company.
An SMSF has been designed to allow it to continue indefinitely, however the right structure is required. Since a corporate trustee is a company, which also have an indefinite lifespan, by using a corporate trustee you are guaranteeing that the SMSF can last forever and be passed down tax effectively from one generation to another.
3. Single Member Fund
The individual trustee structure requires that a minimum of 2 individual trustees. What this means is that if you wish to set up your own SMSF where you will be the sole member, you will need to appoint another individual to be your trustee. This means you are effectively giving another person authority to be involved in fund decisions.
For a corporate trustee structure the sole member can also be the sole director the company. No additional individual will need to be appointed and therefore you will retain sole authority over all decisions made with regards to the funds.
4. Change of Membership
As the SMSF can continue indefinitely, it is important to consider the situation where there is a change to members who are part of the fund, either because you wish to add new members or remove members. As all members of the fund need to be either an individual trustee or director of the trustee company, this means that certain forms and paperwork will be required.
If the fund has an individual trustee structure, the task of adding or removing individual trustees is complex and more expensive than the process of adding or removing a director for a corporate trustee. Changing individual trustees requires the ownership of all the fund’s assets to be changed to reflect the new structure. If the fund has property or other assets this requires that the title to be transferred to the new trustees. Compare this to the situation where there is a corporate trustee. Since there is no change to the company in the sense that it is still in existence, all this is required is a change to will be a director meaning that the ownership of the fund’s assets remains unchanged.
5. Estate planning considerations
If a member dies or becomes mentally incapacitated, this can lead to significant issues as to whether the fund still complies with regulations.
Imagine a situation where the fund was a two member fund (husband and wife) with individual trustees and the husband has just passed away. The nightmare would have just begun because instead of having time for the wife to grieve, they instead need to manage the SMSF and all the administrative requirements as well as look to appoint a new individual trustee to ensure the fund is still complying. This will also require transferring of title of the assets to this new trustee.
If however they used a corporate trustee structure, the surviving member would be allowed to continue as the sole surviving director. This will not require any new structure to be established nor any transfer of title as there is no change to the corporate trustee. The added certainty from a corporate trustee will become invaluable in the situation where the other members require time to grieve the death of a loved one.
6. Lending and loan to value ratios restrictions
Many individuals wish to set up an SMSF so that they can borrow to purchase residential or commercial property with their super monies. If you don’t have a corporate trustee, you are generally limited to the number of banks that will lend money to your super fund. Also, due to legal concerns and issues, most lender will restrict the amount of money they lend to individuals. For example, lenders may be willing to lend up to 80% of the purchase price of a property to an SMSF with a corporate trustee, yet only lend up to 70% for a SMSF with individual trustees.
As a result, having individual trustees can result in your SMSF not being able to access lower interest rates offered by certain lenders to SMSF and your ability to purchase property in your SMSF can be significantly limited.
7. ATO penalties can be magnified
From July 2014, the ATO acquired the power to impose penalties for breaches of superannuation law to the trustees. This means that if you have more than one trustee (individual trustees), penalties are levied on each trustee for each infringement.
For example let’s say you had an SMSF with two members and they are both trustees. If they breached super rules, they could be fined up to $10,200 each for the infringements, totalling $20,400 in penalties.
However if they were directors of a trustee company, the penalty of $10,200 would be levied only on the corporate trustee. As a result, the directors/members would be jointly liable to meet the penalty.