Self Managed Super Funds are a powerful investment structure but many people are failing to seek professional advice when setting up their fund and consequently getting it wrong with potentially serious consequences.
When you establish a SMSF, you must nominate at least two people or a company as trustees of the fund. For single member funds, it is possible to add a second person as a non-member trustee, however this then means they will have to sign off on all the trustee minutes, accounts and tax returns as well as having full access to the investments of the fund. Hence, most single member funds tend to use a corporate trustee.
Aside from this, there are five main reasons you should consider setting up a corporate trustee for your SMSF. They are administration efficiency, protection from liability, ability to pay a lump sum, accessing the 15% pension rebate and estate planning. Let’s look at each of these more closely.
Because of the legislative requirements that all members of a SMSF must also be trustees and that the assets and investments of the SMSF must be held separate from the assets of the trustees, not having a corporate trustee can result in an administration nightmare.
Take the case of a SMSF with individual trustees, let’s call them Mr and Mrs John and Jane Doe. Any assets that the fund purchases on their behalf would be owned as follows where ATF stands for “as trustee for”:
John Doe & Jane Doe ATF Doe Super Fund
If a new member comes into the fund or one of the members dies, then the trustees of the SMSF as well as the ownership all of the investments will need to be updated accordingly. This means also contacting every bank, fund manager and government institution involved or paying someone else to do it for you. Dealing with real estate titles or state revenue offices is rarely a simple process.
If the SMSF has a corporate trustee, it is a quick and simple process to add a new member of the fund and then correspondingly as a director of the corporate trustee.
Tax and Stamp Duty
If a member comes in to or out of the SMSF, updating the title the assets within the fund may incur stamp duty and potentially capital gains tax if the assets have not been structured correctly.
Protection from Liability
When a SMSF invests in property, there is a corresponding risk of something going wrong or somebody being injured and the trustees of the SMSF can be held personally liable for damages which would place all of their other assets at risk. A corporate trustee protects the individual members from this liability. It is important to use a separate company as your trustee as if it was a trading company and got into financial trouble, creditors could seek to seize the assets of the company including the assets of the SMSF.
If you intend to borrow money (gear) to purchase assets in your super fund, banks almost always require that the SMSF has a corporate trustee.
In the event of the death of the trustees of the SMSF, the fund would normally be would up, the assets sold off and the proceeds distributed to the beneficiaries. If the assets include non-liquid assets like property and they are sold in a hurry, a significant loss can be realised in the process. A corporate trustee allows someone else to take over the running of the SMSF, giving them the luxury of time to decide how to best manage the assets and the taxation implications that come along with them.
With a corporate trustee, it may possible for the SMSF to pay a tax effective pension to financially dependent beneficiaries of the fund once a member in pension phase has died. Without a corporate trustee in most cases, the fund would need to be wound down and the benefits distributed as lump sum payments.
In summary, for most people setting up a SMSF, it makes a lot of sense to pay the extra to get a corporate trustee setup from the beginning. If you already have a SMSF with individual trustees, it’s worth considering changing to a corporate trustee as the benefits far outweigh the cost.
If you would like more information about getting a special purpose trustee company for your existing or new SMSF, please click here to contact us.