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Corporate vs individual trustee structure
Corporate vs individual trustee structure
One of the significant decisions to be made when establishing an SMSF is whether to appoint an individual or a corporate trustee to be responsible for the fund’s compliance and legal obligations. Despite the significance of this decision, many SMSF members appoint trustees without knowing or understanding the significance and the difference between the two structures.
Seventy one per cent* of SMSFs decide on an individual trustees structure, compared to just 29 per cent* who choose a corporate trustee structure. It’s important for your clients to understand the advantages and disadvantages of each trust structure before they make that decision.
There are four main issues to consider when determining whether to use an individual or a corporate trustee. These include:
· clarity of ownership
· continuity
· liability
· cost and convenience.Clarity of ownership
One of the important superannuation legislation requirements is that the assets of the fund must be kept separate from any assets held personally by the trustee. The use of a corporate trustee, with a separate identity, reduces the risk of personal assets becoming intermingled with fund assets.
Continuity
A company has an identity of its own, separate from its shareholders and directors, and can exist indefinitely. If a director of a corporate trustee dies or becomes physically or mentally incapacitated, the corporate trustee continues to act as trustee.
If two individuals are acting as trustees and one of them dies or becomes disabled, then their legal personal representative (LPR) can generally stand in as trustee. However, in the event of death, the LPR can only continue to act as trustee up until the first death benefit payment is made. After this time, the remaining trustee must appoint an additional trustee or become the sole director of a corporate trustee.
The appointment of an alternative individual trustee may, in some cases, create difficulties when it comes to distributing death benefits as well as sharing personal financial information.
In the event that one member leaves the fund, they must retire as a trustee and the remaining trustee must appoint a replacement. However, where a corporate trustee is used, the remaining member can continue as the sole director.
Another important difference between an individual and a corporate trustee structure is that if the trustee is a company, the company is the legal owner of the fund’s assets. If the directors of the company change, there is no change in the legal ownership of the assets. If individuals are trustees, it is necessary to change the legal ownership of the assets each time there is a change in the trustees. This can be a time consuming and expensive exercise.
Whilst we regularly consider the potential impacts of the death or disability of a trustee, other circumstances that result in one trustee leaving, such as divorce, bankruptcy or a lack of desire to be an SMSF trustee, need to be taken into consideration.
Liability
All trustees are liable to members for any losses incurred as a result of a breach of trust. Individual trustees are personally liable whereas corporate trustees are liable to the extent of the assets of the company (usually $2) unless the directors can be made personally liable (which they generally will be).
Government regulators (ASIC, APRA, ATO) are also more likely to pursue directors personally rather than pursue a $2 company.
Cost and convenience
While there are additional costs involved in establishing and running a corporate trustee structure, these costs (with the exception of an annual ASIC fee of $40) are usually only incurred at the registration and establishment process with ASIC.
Appointing an individual trustee means that the legal ownership of the assets must change each time there is a change in trustee, resulting in significant additional costs. It is also a process that is likely to be required at a time when the remaining trustee is least interested in attending to such matters (ie upon the death or disability of a spouse). If the directors of the corporate trustee change there is no need to change the legal ownership of the assets and no costs are incurred.
Individual trustees – advantages and disadvantages
An individual trustee structure is cheap and easy to establish and maintain, until something changes!
Changing asset ownership details when a trustee changes can be time consuming and expensive. When appointing a second trustee for a single member fund (or when a member leaves the fund), decisions about future retirement savings as well as sharing personal financial information can also be uncomfortable and lack confidentiality.
Corporate trustees - advantages and disadvantages
The fund assets are registered in the corporate trustee’s name and the corporate trustees can continue indefinitely. A corporate trustee structure is also an inexpensive and easy way to deal with membership changes as a result of death, disability or divorce.
The corporate trustee structure provides the ultimate level of control and a confidentiality solution for a single member fund.
There are, however, additional costs involved in establishing a corporate trustee and preparing and lodging an annual return. There may also be additional complexity as the constitution of the corporate trustee may also need to be referred to when decisions are being made.
The choice between utilising individual trustees or a corporate trustee structure is an important decision for clients who are considering establishing an SMSF. It may also be a timely review for clients who currently have individual trustees.