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The importance of keeping SMSF assets separate

The importance of keeping SMSF assets separate

Current as of July 2016

 

Apart from the higher initial establishment costs of setting-up a Corporate Trustee in comparison to Individual Trustees, the real cost only unfolds when things go wrong, either with the members or within the fund.

It is important to have a Corporate Trustee for your SMSF, and this should be its sole purpose – that is, it does not act in any other capacity (i.e. a trading company).

By not having the company as a sole purpose company for your SMSF, there is a risk that the activities of the company in its other capacity, could expose the assets of the fund to claims by creditors.

This can be illustrated in the case of Frigger v Computer Accounting & Tax Pty Ltd (in liq) [no 10] [2016] WASC 63.

Example of when it goes wrong – Frigger v Computer Accounting & Tax Pty Ltd (in liquidation)

Computer Accounting & Tax Pty Ltd was the Corporate Trustee of an SMSF. It also operated as an accounting business. The company was the legal owner of two real estate properties and a term deposit. The members of the fund were Mr and Mrs Frigger, and by the time this 2016 case came to fruition, the trustees of the SMSF had been changed to Mr and Mrs Frigger as Individual Trustees.

Over time, the accounting business ran into trouble and eventually went into liquidation. The lawyers for the plaintiffs, Mr and Mrs Frigger asserted that the two properties were held on Trust for them as the beneficiaries of the SMSF, and were not assets of the accounting business.

Individuals versus Sole Purpose Corporate Trustees – what are the practical differences?

A Corporate Trustee is better able to deal with changing circumstances, such as member’s incapacity or death, or when an existing member wishes to leave or a new member wishes to join the fund. This is very important as the fund’s assets must be held in the name of the Trustee, so if the individual Trustees change, then all the ownership details of the fund’s assets must also be changed – this can be an onerous and costly exercise for the remaining Trustees.

Limited liability of Directors

The “corporate veil” of a company limits the liability of the Directors to the assets held within the SMSF, in comparison to individual Trustees being wholly accountable for any liabilities incurred as Trustees, potentially resulting in being personally responsible to cover any excess claims.

Separation of assets

The superannuation legislation requires that the Trustees of a SMSF must keep the money and assets of the fund separate from any assets held by the Trustee personally (Regulation 4.09A[2] of SISR 1994). Hence if individual Trustees were in place, confusion over who owns the assets and a chance of contravention could occur. In addition to administrative confusion, legal problems may arise if one of the Trustees becomes bankrupt. In contrast, if an SMSF has a Sole Purpose Corporate Trustee then the separation of assets is definitively clear.

ATO’s Trustee penalty regime for breach of superannuation laws:

Individual Trustees Corporate Trustee
Administrative penalties are levied on each Trustee. For example, for failing to prepare financial accounts and statements, each Trustee would be liable for a $1,800 penalty (10 penalty units), which would amount to $7,200 if there were four trustees. Administrative penalties are levied on the Corporate Trustee. For example, for failing to prepare financial accounts and statements, a Corporate Trustee would be liable for a $1,800 penalty (10 penalty units).

Summary

Though a large portion of SMSF Trustees are still individual Trustees, the importance of having a Sole Purpose Company acting as the Trustee should not be overlooked.

Should you wish to discuss the process of changing your fund’s Trustee structure please contact our office today.

 

DISCLAIMER
This newsletter has been produced by Stanley & Williamson as a service to its clients and associates. The information contained in the newsletter is of general comment only and is not intended to be advice on any particular matter. Before acting on any areas contained in this newsletter, it is imperative you seek specific advice relating to your particular circumstances. Liability limited by a scheme approved under Professional Standards legislation. 

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