Many SMSF’s are established with individual trustees as it’s quick, easy and generally the cheaper option. However, many SMSF trustees are not aware of the pitfalls of having individual trustees, only later to find out the upfront cost savings turn out to be the more expensive option in the long run.
Below is a general summary of the main benefits of having a corporate trustee compared to individual co-trustees for your SMSF:
New SMSF Trustee Penalties
Probably the most significant and most important reason to appoint a corporate trustee. From 1 July 2014, the ATO has been issued new administrative powers to issue SMSF trustees with fines for breaches of the superannuation law. While we appreciate that your SMSF might be in a low-risk category for this, the penalty regime discriminates against individual trustees.
For example, if the ATO issues a maximum fine for providing financial assistance to a member’s relative, then each individual trustee will be liable for the $10,200 penalty (that’s $40,800 in total assuming a SMSF with 4 members/trustees).
However, with a special purpose company appointed, the fine issued against the company is only for $10,200, for which you as directors are required to pay you equal share (e.g. $10,200 / 4 directors = $2,250 each).
The ATO powers allow for penalties to be issued for multiple breaches in a single year, or for every year that particular breach occurred. Furthermore, the Fund can not pay for, nor reimburse you for any penalties issued by the ATO.
Limited Liability
Individual trustees are ‘jointly and severally’ liable for any legal action taken against a SMSF as they hold the assets in trust. Where the compensation or claim exceeds the SMSF assets, the personal assets of the individual trustees are then at risk.
By appointing a special purpose company as trustee of your SMSF, the company will have a nominal asset base (e.g. 10x ordinary shares issued equally to all 4 members at $1 each = $40 assets). Therefore; in the event of any legal action, you will have the peace of mind knowing your personal assets are not at risk as a director of the special purpose company.
Flexibility with membership & estate planning
Having a corporate trustee allows your SMSF to more easily add and remove members and directors in the future. For example, your children may look to join or exit the SMSF in future years and this can be simply completed by updating the ASIC director register to remove or add them.
Another benefit is from an estate planning perspective. If a member were to pass away, the surviving members can arrange payment of the death benefit without needing to appoint any additional trustees to the SMSF (e.g. the deceased member’s legal personal representative or executor). Also if there was only one surviving member, they could remain a sole director and still comply with the law (or appoint a second director at a later stage).
An important part of the estate planning process is to ensure you have correctly dealt with the shares of the corporate trustee in your Wills. The shareholders will have the power to appoint and remove directors of the corporate trustee, so you will need to consider who you believe should hold this power if you were to pass away.
Lump sum benefits
The superannuation laws are based on the Australian constitutional powers and require either a corporate trustee be appointed, or the SMSF must pay only pensions. Therefore, from a technical and strategic perspective, you would not be allowed to access your super via a lump sum benefit payment. How would this impact you is difficult to quantify as we can’t predict the future.
However, as an example, there are strategies that involve transferring SMSF assets out to members as ‘in-specie payments’ accessing up to $180,000 tax-free between the ages of 55 to 60. These strategies are not available to SMSFs with individual trustees but to eligible members where a corporate trustee has been appointed.
How can we help?
We hope you have found this informative. Please let us know if you have any questions or if we can be of further assistance by calling Jason McLaren on 0418 800 363.
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The information contained in this article is general in nature and does not take into account your personal situation or objectives. You should not act on this information in any way before seeking professional advice.
