Should the trustee of a Self Managed Superannuation Fund (SMSF) be a company or the individual members?
When you establish a SMSF you need to decide on the trustee structure. You can choose from either of the following;
- up to four individual trustees, or
- a corporate trustee
In the case of individual trustee of the Self Managed Superannuation (SMSF) there can be no more than four members and each member must be a trustee.
In the case of a company acting as trustee each of the members, again limited to four, must be directors.
So what is the difference?
There is no additional cost on set up to have individuals as trustees of the fund. The fund is required to lodge an SMSF annual return and pay an annual supervisory levy to the ATO.
If you are using an existing company as trustee for the SMSF, there will be no additional costs as the company is already established and ASIC lodgment requirements are being met. However, if you don’t have an existing company or chooses to have a separate company that acts solely as trustee of the fund the members will incur establishment costs. In addition to the establishment costs, the fund is required to lodge an annual return to ASIC. A reduced annual fee applies to annual returns for companies whose sole purpose is to act as trustee of an SMSF. The fund is also required to lodge an SMSF annual return and pay an annual supervisory levy to the ATO.
Generally banks tend to lend a maximum of 70% of the purchase price of the investment property. Please contact your banker to discuss their lending criteria for further information.
Generally banks tend to lend a maximum of 80% of the purchase price of the investment property. Please contact your banker to discuss their lending criteria for further information.
It is important to keep a clear division between assets of the fund and assets of the individual.
This is an area that is consistently breached by trustees of SMSFs and is therefore an issue that the ATO pay particular attention to when reviewing the administration of SMSFs. A fund with individual trustees must ensure that it is recognised as having clear title to the relevant asset. This would generally require that the asset is held in the name of all trustees ‘as trustee for’ the name of the superannuation fund.
It is equally important for funds with a corporate trustee to keep a clear division between assets of the fund and assets of the company. This is not really an issue for corporate trustees that act solely as trustee for the super fund as the assets of the fund are held exclusively in the company’s name. However, corporate trustees that are acting in a number of capacities may hold assets for more than one purpose and are exposed to the risk that ownership of assets may not be identified correctly. Inadequate recording procedures may result in assets which are in the name of the company as trustee of the super fund being confused or mixed with assets in the name of the company as trustee of the business trust.
Change of member/trustee
New members who join the fund must become a trustee of the fund. Similarly, when an existing member leaves the fund they must resign as a member. Changes to a member / trustee must be done in accordance with the SMSF’s trust deed and the SIS Act. The ATO must also be notified within 28 days of the change. Assets of the fund are held in the name(s) of individual trustees. When there is a change of member the ownership of the assets will need to change to the new and/or remaining members in the fund. This can be a frustrating, time consuming and costly exercise for trustees particularly where the fund has a large number of investments, for example, numerous parcels of shares with different registries or stock brokers. Depending on which state you live in, stamp duty may also be payable on the change of a trustee.
When a fund with a corporate trustee has a change of member, the new member must become a director of the trustee company and the change notified to the ATO and Australian Securities and Investments Commission (ASIC) within 28 days. There is no change to the trustee company itself, just a change in the directors of the company. As the assets of the fund are held in the name of the corporate trustee there is no need to change ownership of the fund assets when there is a change of director.
Estate planning – Death of a Trustee
If the fund has two members and one member dies, a replacement trustee must be obtained for the fund to remain valid. You cannot have a sole individual trustee in a SMSF. Replacing a trustee on death is also no different from changing a trustee at any other time. The same issues raised earlier that are associated with the changing of a trustee also apply on death.
If a corporate trustee has two directors and one dies the trustee can continue without the need to obtain an additional director. An SMSF can have a corporate trustee and operate with one or two directors provided one of the directors is also a member of the fund. This is an advantage over having individual trustees which require a minimum of two individuals as trustees.
Individual trustees hold assets of the fund in their own names as trustee for the SMSF and are therefore jointly and severally liable for any legal action taken against the fund. This has the potential to place trustees personal assets at risk to legal challenge.
Corporate trustees hold assets in the name of the company which has limited liability. This may provide some level of protection to the personal assets of the directors of the corporate trustee.
Individual trustees are liable to civil and criminal penalties for breaches of SIS. Penalties will vary depending on the severity of the breach with each penalty unit currently worth $110. The maximum financial penalty for an individual trustee is 2000 penalty units (i.e. $220,000).
Corporate trustees are also liable to civil and criminal penalties. The maximum financial penalty for a corporate trustee is 5 times the amount of that for an individual trustee (i.e. 10,000 penalty units or $1.1M).
Here at The Quinn Group our experienced team of Financial Planners, Accountants and Lawyers can provide you with the total solution and assist you with all your taxation, legal and financial planning needs. For more advice on your financial goads for 2013, contact Peter Quinn by submitting an online enquiry or calling us on 9580 9166 to book an obligation free appointment.
The information in this document does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it. It is important that your personal circumstances are taken into account before making any financial decision and it is recommended that you seek assistance from your financial adviser.