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Blog

November 18th, 2014
What's our choice? Individual vs corporate trustees by Daniel Martinez

Every trust must have a trustee.  The same rule applies to self managed super funds (SMSF).  The decision you need to make is whether you have individual trustees or a corporate trustee.    By ‘individual’ trustee I mean you have a human being as a trustee (usually a member of the SMSF).  By ‘corporate’ trustee I mean you have a company as the trustee.

I am often asked what the best trustee structure is.   From a legislative viewpoint there is no preference, but there are many practical reasons why I think a corporate trustee is a better choice.

 Greater administrative efficiency

All assets of an SMSF must be held in the name of the trustees. For individual trustees, the names on the titles of every asset must be changed each time a member enters or leaves the fund. This can be a costly and time consuming process. With a corporate trustee, there is no such requirement, as the assets are held in the name of the corporate trustee company.

Practical problems can also arise for funds with three or four individual trustees. Often share registries and broker services cannot cater for more than two names on the title of an asset or on an account name.

Even more interesting is the way registries deal with the death of an individual trustee, which generally involves a two-step process. The asset is treated as being jointly owned by the individual trustees and upon the death of one trustee the asset is transferred to the surviving individual trustees. As a result, another off-market transfer is required to move the assets from the name of the original surviving trustees to the names of the new trustees. If a corporate trustee was in place, this two-step process would not be necessary.

 Asset protection

As a corporate trustee company is subject to limited liability, this may provide greater protection of personal assets. A relatively recent case has highlighted how individual trustees could be held personally liable for the actions of another trustee.

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 Australia Taxation Office (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.

It is important to note that a corporate trustee structure may not necessarily provide protection from penalties, as under the Superannuation Industry (Supervision) (SIS) Act, the regulator is able to pursue any one involved in a breach of the applicable legislation.

 Succession planning

Since a company has an indefinite lifespan, it’s easier to pass down a fund with a corporate trustee from one generation to another.

Having a corporate trustee also allows for a smoother and simpler transition once a member dies. For example, if a fund with a corporate trustee has two members and one member dies, the corporate trustee can continue with a single director. On the other hand, if an individual trustee fund has two members and one member dies, an additional trustee is required if the individual trustee structure is to be maintained. Alternatively, the fund will need to adopt a corporate trustee, appoint an approved trustee, or be wound up.

Borrowing within superannuation

If an SMSF wishes to borrow funds under a Limited Recourse Borrowing Arrangement, lenders generally insist the SMSF has a corporate trustee, even though this is not a legislative requirement.

 Trustee penalties

The recent introduction of a new penalty regime for SMSF trustees provides a further reason to consider a corporate trustee as the preferred option.

The ATO now has a range of options available to prevent and address instances of non-compliance by SMSF trustees, including the ability to issue administrative penalties. The administrative penalty regime applies penalty units on a sliding scale to certain contraventions, based on the nature and seriousness of the breach. The penalty applies per trustee and cannot be paid for by the fund.

Where the fund has a corporate trustee, all directors are jointly and severally liable to pay the total penalty amount. If the fund has individual trustees, generally each trustee will be individually liable to pay the penalty amount.

 Making the switch

For existing SMSFs with individual trustees, the trustees can be replaced by a corporate trustee via a deed of retirement and appointment.

Generally, to be an SMSF, all directors of the company need to be members and all members need to be directors of the company. If you decide to replace the individual trustees with a corporate trustee, make sure the registration of fund assets is correctly updated to reflect the change in legal ownership.

 Bye for now

 Dan’s Corner

 Source: Multiport Spotlight September 2014

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