Australian Taxation Office statistics suggest that a large majority of SMSFs have individual trustees. This is troubling, considering that sole purpose corporate SMSF trustees have been known to be superior for many years. This covers the main reasons to have a sole purpose corporate trustee. The ‘sole purpose’ indicates that the company only acts in one capacity (as an SMSF trustee).
Naturally, DBA Lawyers offers documents to set up a new company that can be used as a sole purpose corporate trustee.
Succession and reduced paperwork
A corporate trustee cannot die and offers better continuous succession. On the other hand, if individual trustees change or one dies, administrative hassles can result (such as having to update ownership documents). If real estate is involved, it is up to the trustee to show the revenue office that no duty should be payable as a result of the change of trustee. This can involve submitting substantial paperwork.
When adding a person to the trustee role, this usually less work-intensive for a corporate trustee. For individual trustees, adding one or more persons to the trustee role actually constitutes a change of trustee. On the other hand, in the case of a corporate trustee, adding directors to a company does not technically change the trustee itself, since the trustee is the company. Because of this technicality, it is usually less troublesome to add directors to a company than to add individual trustees.
Also, corporate trustees can help a fund stay within the requirements to be an SMSF, which broadly helps the fund stay complying in the ATO’s books. In particular, in the case of a single member fund with a two individual trustees, if one dies, the fund cannot remain an SMSF with only one trustee and one member. On the other hand, because of a quirk in the legislation, a corporate trustee with one director, with a single member fund, can still meet the SMSF definition.
Bank requirements and limited recourse borrowing (bare trusts)
If an SMSF with individual trustees tries to engage in limited recourse borrowing with a bank lender, the bank will usually insist on a corporate trustee. If this occurs part way through the process, it can be obstacle to the loan’s progression.
Sole purpose corporate trustees offer greater asset protection in the case of an SMSF at risk or in debt. For example, if an SMSF trustee is sued and a large debt results, individual trustees have their personal assets at stake if the SMSF assets are insufficient. In contrast, a corporate trustee is a separate legal entity, offering better protection.
Keeping assets separate
The ATO has stated that the ‘separation of assets’ contravention is a very commonly reported contravention. The relevant law states (in part) that a trustee must keep its money and assets separate from money and assets ‘held by the trustee personally’. Accordingly, having a sole purpose corporate trustee generally prevents this contravention from occurring because of the separation of entities, and because the trustee will not have any personal money (it will only have SMSF money). On the other hand, if an SMSF with individual trustees mingles SMSF money with the members’ personal money, this is a contravention.
For this reason, a sole purpose corporate trustee can help to minimise inadvertent contraventions.
SMSF penalties legislation
The SMSF administrative penalties rules allow the ATO to impose administrative penalties on SMSF trustees for the contravention of certain superannuation rules. Directors of corporate trustees are jointly and severally liable to the penalty. Individual trustees are liable to one penalty each. Consequently, having a corporate trustee instead of individuals can mean fewer ‘heads on the chopping block’ for penalties.
While it can be possible for a company to wear ‘more than one hat’, eg, operate as an SMSF trustee and a discretionary trust trustee, this can create confusion and lead to mistakes. There have been at least several instances where a company has stopped being used in one capacity, leading to its formal deregistration, with all parties having forgotten that it is also used as an SMSF trustee. Accidents like this can lead to serious problems. Accordingly, this is another reason that a sole purpose corporate trustee is ideal.
There are highly technical rules for SMSF residency that broadly require an SMSF to meet the ‘Australian superannuation fund’ definition in order to retain tax concessions. Under these technical rules, it is usually easier to evidence that the central management and control of a corporate trustee remains in Australia.
Annual review fee discounts
For SMSFs implementing a sole purpose corporate trustee, a concessional annual ASIC fee can apply (the discount is approximate 80% compared to the normal proprietary company annual fee). However, advisers and company directors must be wary of the special eligibility requirements. Firstly, it must be that the sole purpose of the company is to act as the trustee of a regulated superannuation fund. Secondly, the constitution of the company must prohibit distribution of the company’s income or property to its members. Accordingly, it is not the case that ‘any old constitution’ is suitable.
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This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional.
Note: DBA Lawyers hold SMSF CPD training at venues all around. For more details or to register, visit www.dbanetwork.com.au or call 03 9092 9400.
For more information regarding how DBA Lawyers can assist in your SMSF practice, visit www.dbalawyers.com.au.
6 February 2017