There is still some discussion as to whether an SMSF should have individual or corporate trustees. This is primarily due to the additional setup cost for the company and its ongoing fees (which are discounted by 80% for a special purpose corporate trustee). In rare cases it is because the members don’t want to obtain a director ID.
During the life cycle of an SMSF new members may join and existing members leave the Fund or become deceased. For an individual trustee Fund this will necessitate changing the title of each investment and altering the trust deed to reflect the new trustee situation. It can be quite difficult to change the title for direct real estate. Most other assets are easier, but some may not be. In addition, as most Fund members comprise only a husband and wife, the process of considering trustee options can be traumatic for the survivor when a spouse dies. With a corporate trustee the trustee remains the same. All that is required is a notification of the altered trustee situation to ASIC even if there is only one director remaining.
A single member Fund must have two individual trustees. For a corporate trustee, the single member can be the only director and enjoy sole control. There is no need for a second, non-member director, though one can be included if the member wishes.
Trustee voting powers can vary from Fund to Fund depending on the powers in the Deed however, if a dispute occurs between trustees, individual trustee Funds may have a problem as individual trustee decisions must generally be unanimous. There is some dispute as to whether special deed powers conferring greater voting rights on some individuals and the ability for majority decisions to be valid will stand up to a challenge. The decisions of a corporate trustee can be carried by a majority. In addition, the shares in a corporate trustee can have different voting rights and ownership which can have advantageous estate planning ramifications.
A special purpose corporate trustee is effective in separating ownership from personal and business assets. Quite apart from the Regulators requirement that such a separation be maintained this is also useful if the members, or their businesses, become bankrupt or have a receiver appointed. There have been instances where Fund assets, particularly property, have been inadvertently used to secure business or personal financial arrangements resulting in not only their loss to the Fund but further penalties from the Regulator as well. Even if no encumbrance is in place, it can take some time to convince a receiver that property held in the individual’s names is held in trust for the Fund.
If the Fund intends to enter a limited recourse borrowing from a financial institution it is often the case that the institution will lend a higher amount and/or charge a lower interest rate if the Fund has a corporate trustee. Many will require a corporate trustee as mandatory.
If some major mishap occurs within the Fund, perhaps a person being badly injured on the site of the Fund’s property, resulting in a claim for damages which depletes the Fund’s assets in full, it is more likely that the claimant can successfully continue the claim against individual trustees in their personal capacity than against them as directors of a corporate trustee.
A major argument in favour of corporate trustees is the implementation of the SMSF penalty regime. Penalties can be as high as $18,780 for many common infringements such as lending to members or in-house asset breaches. These will be applied per individual trustee or per corporate trustee. This will result in the trustees of a four-member fund being fined four times more ($75,120) then if they were, collectively, directors of a corporate trustee ($18,780). Such fines must be paid by the individuals concerned. They cannot be paid or reimbursed by the SMSF.
To assist in this discussion, we have produced a You Tube video.
Unsurprisingly, we strongly support the use of corporate trustees in every case. Anecdotally, SMSF that have been set up by financial planners usually have a corporate trustee. Most funds established by trustees directly, or via their accountant, tend to have individual trustees.
