Regarding the SMSF investment strategy, while the initial establishment costs of setting up a Corporate Trustee may be higher than Individual Trustees, the actual expenses become evident when issues arise concerning the members or the fund itself.
Having a Corporate Trustee for your SMSF is essential, 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 fund members 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 in 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 can better deal with changing circumstances, such as a member’s incapacity or death, 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. If the individual Trustees change, 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, compared to individual Trustees being wholly accountable for any liabilities incurred as Trustees, potentially resulting in being personally responsible for covering any excess claims.
Separation of assets
The superannuation legislation requires that the Trustees of an 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), amounting 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 many SMSF Trustees are still individual Trustees, 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 get in touch with our office today.
Kreston Stanley Williamson Team
*Correct as of July 2016
Disclaimer – Kreston Stanley Williamson has produced this article to serve its clients and associates. The information contained in the article is of general comment only and is not intended to be advice on any particular matter. Before acting on any areas in this article, you must seek advice about your circumstances. Liability is limited by a scheme approved under professional standards legislation.
