Should the trustee of my SMSF be a company or the individual members?
The trustee of your SMSF can be either a company or the individual members.
Superannuation legislation specifies the composition of the trustees or directors of the trustee company.
Where there are individual trustees, each member must be a trustee and each trustee must be a member of the fund.
There is an exception for single member funds with individual trustees: the member plus one other person must be trustees (this is to get around the legal problem that a single member fund with that person as sole trustee is not actually a trust and therefore cannot be a superannuation fund).
Where a company is the SMSF trustee, each member of the fund must be a director of the company and each director must be a member of the fund.
Special rules again apply for single member funds. In this case, the company can have the member as sole director and sole secretary if its constitution permits that. However, a single member fund can have one additional director who is not a member of the fund.
When setting up a self-managed superannuation fund, you need to decide whether a company or the members will be trustees.
In many cases, the individual trustee option is chosen because there are costs associated with having a company.
There are costs to set up a company and annual costs to maintain it. However, saving a few dollars can be false economy. This was spectacularly demonstrated in the AAT decision for the Shail Superannuation Fund.
The Shails were married in 1980 and set up an SMSF in 1994 with individual trustees.
Following the end of their relationship, in mid-2005 Mr Shail transferred $3.46 million to an overseas bank account without the knowledge of Mrs Shail. As neither qualified to withdraw a benefit from the fund, the Tax Office subsequently issued a notice of non-compliance, an assessment for tax at the top marginal rate ($1.58 million) and notice of a penalty of $1.47 million. Mrs Shail was required to pay $3.05 million even though the fund had negligible assets remaining.
Upon appeal to the Administrative Appeals Tribunal (AAT), the tribunal expressed sympathy for Mrs Shail but said she was a trustee of the fund. The theft of fund assets by her former husband did not reduce her responsibilities as trustee. Therefore, the assessment and penalty must stand. We can only imagine the angst Mrs Shail went through. We can only presume that she lost her home and most other assets as a result of the decision.
But the simple difference of having a company as trustee could have made an enormous difference.
In that case, we believe the company would have been primarily liable to pay the tax and penalty.
With no assets other than what remained in the superannuation fund, Mrs Shail would not have been directly responsible for the debt to the Tax Office. We don’t know how much that was but assume it was a negligible amount.
The Tax Office could have pursued her based on being a director. But we believe the Tax Office would have had little chance of success. She was not a party to the theft, nor aware of the theft at the time.
Such circumstances are fortunately rare and we all hope to never experience such an event. However, the relatively modest cost of having a corporate trustee would likely have averted the tragic financial outcome experienced.
Other than this extreme example, there are more practical reasons why a company is preferred as the SMSF trustee.
Firstly, where there are changes in member composition of the fund, which could include adding children or the death of a member, the process will be far simpler where a company is trustee. The principal work required will be notifying ASIC of a change of directors and notifying the ATO. Also required is updating signature records with banks and similar institutions.
Where individuals are trustees, a change of fund membership means a change of trustee, in which case the ownership of every asset in the fund must be changed from the old to the new trustees. And after changing ownership, banking details for dividends, distributions, contributions and pension payments may all need to have amendments. The ATO still needs to be advised as well. This is an involved and expensive process.
Secondly, having a company as trustee will make it simpler to meet regulations requiring that fund assets be separate from personal assets. Especially if the company does nothing more than be a trustee of a SMSF.
If you have a company as trustee of the fund, ASIC makes provision for a relatively low cost annual ASIC fee of $42 if the company is a special purpose company. That means it’s sole role is to be trustee of your SMSF. Similarly, the costs of establishing a new company is now less than in prior years.
If setting up a new SMSF, we strongly encourage using a company as trustee.
The risk reduction and future simplicity should more than justify the cost. However, we do recommend you seek professional advice relevant to your individual circumstances in all cases.
Article by David McKenzie, Financial Adviser / SMSF Specialist
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Disclaimer: Information contained within this article is of a general nature. Do not be rely upon it when making financial decisions. Please consult a professional financial advisor or planner (like us!) before acting.