SMSFs need a trustee - should it be a company?
Self Managed Super Funds are governed by legislation which dictate that a fund must have a trustee/s: this may be real people (at least two) or a proprietary company. Many clients ask us: what are the reasons for deciding to use a company? Isn’t it simpler and cheaper to have individuals as trustees?
The advantages of establishing a corporate trustee in most cases outweighs the additional costs of establishment and compliance.
A couple of basics:
- With individual trustees, all members must be trustees and each trustee must be a member.
- If the fund is a single member fund then the sole member can’t be the only trustee – another individual must be appointed as trustee (not an employee of the member, unless they are related).
- If using a corporate trustee, all members must be directors of the trustee company and all directors must be members of the fund.
- If a single member fund has a corporate trustee, the member can be the sole director of the trustee company or there can be another director (not an employee unless related).
There are disqualification rules relating to both individual and corporate trustees. The policy is that a trustee must have the legal capacity, solvency and good character to fill the role.
Succession
As a company and an SMSF can continue indefinitely, certainly beyond the lifetime of a member, a corporate trustee can provide greater certainty and continuity over control of the fund in the event of the death or incapacity of a member.
Single member funds
A sole member is permitted to be a sole director of a corporate trustee or there can be another director (not an employee, unless related).
A company may not act as trustee if:
- A responsible officer (including a director, secretary or executive officer) is a disqualified person
- The company has commenced the insolvency process; or
- Action has started to wind up the company.
Lump Sum Payments
In 2006 the Australian Tax Office confirmed the power of individual trustees to pay lump sums out of a superannuation fund (without first starting to pay a pension). It had been previously questioned whether individual trustees had this power as a matter of Constitutional law.
Now there is no difference between companies’ and individuals’ legal authority to make lump sum payments.
Change of membership
When a new member is introduced to a SMSF with individual trustees, that person is required to also become a trustee.
Trust assets must generally be held in the trustee/s name/s. This therefore means a new trustee will require the transfer of title to all trust assets (eg property, managed funds, listed securities) to include the new trustee. This process requires significant time in administration and transaction costs.
Similar administrative issues (and costs) arise when a member leaves a fund on death, retirement or for another reason.
By contrast, when members come in or out of a fund with a corporate trustee, they only need to become or cease to be directors of the trustee company. ASIC must be notified of the changes but otherwise, legal title to all assets remains with the company.
A corporate trustee can save significant time and effort particularly where the fund has significant assets.
Trustee protection from litigation
Individual trustees carry joint and several liability which may expose an individual trustee’s personal assets to risk if litigation arises eg a personal liability action in relation to a property of the fund.
With a corporate trustee an action will usually be limited to the assets of the company, not exposing the company directors’ personal assets. The risk of litigation will depend on what activities the trustees undertake.
Cost
ASIC establishment costs of a company are in the order of $600. A change of trustee deed may also be required. There are annual ASIC fees and accounting costs to consider as well.
Family company v dedicated trustee company
Sometimes our clients ask us whether they can use an existing family company as the trustee for their super fund. We tell them it is possible so long as the company’s other roles are kept separate to ensure the assets of the fund are protected.
A dedicated trustee company can provide a clearer separation of assets and director interests and can further reduce the chances of mistakenly mixing fund assets with company assets and reducing the possibility of trustee conflicts of interest, and is often a preferred course of action.
Also, you need to remember that the family company directors must be restricted to the SMSF members which may not suit all situations.
Voting rights and decision making
A dedicated trustee company has the opportunity to control voting powers in proportion to individual members’ accounts.
It is possible to structure directors’ voting rights based on their account balances, giving those with higher balances more control. This can make trustee resolutions smoother if there is an even number of votes or there is a relationship breakdown among trustees.
Members with smaller holdings in the fund should consider whether this approach suits their objectives and take advice on this issue.
Death of a director
The articles of association of a company may provide for the executor of a deceased member to be appointed as a director of the trustee company until the time death benefits are paid from the fund. This is permissible under the SIS Act.
Some companies’ constitutions provide for this to occur automatically – and this may be very important in circumstances of complex family relationships to prevent disputes and the perception of unfair treatment.
We recommend our clients consider this issue on incorporation of their corporate trustee. If you already have a corporate trustee of your super fund, you may wish to consider this issue afresh to avert problems down the track.
Conclusion
An SMSF with individual trustees may be simpler and cheaper at the outset.
However, you should consider all these issues and from our experience we find that in many cases, a corporate trustee is the better option despite some additional costs.
