Why use a corporate trustee when running a SMSF, and what steps are involved to change from individual trustees to corporate trustees? Furthermore, what impact does any change of trustee have on the segregation of fund assets?
This is the basis of a question from one of our readers that I will try and answer this week – “We have been reading many articles regarding the benefits of having a corporate trustee in our SMSF. How do we convert from individual trustees to a corporate trustee? Currently, we have segregated accounts for each individual trustee. If we have a corporate trustee, would it be necessary to incorporate the accounts?”
I will break these questions down into the following parts:
- The difference between individual trustees and a corporate trustee
- How the trustee structure of your fund can be changed
- What is meant by segregation?
- Does a change of trustee mean changes in how assets of the fund are segregated?
As super funds are trusts, they have trustees whose job entails managing the trust’s affairs on behalf of the trust’s beneficiaries.
Often, in a super fund, the beneficiaries are the fund members, but it can also include a member’s dependents such as the spouse and children.
When performing their job, trustees have various obligations and duties, which we won’t look at here.
The most common SMSF structure is a two-member fund with individual trustees. And in the majority of cases, these two members are male and female spouses.
The super laws demand that SMSFs have a specific structure when it comes to members and trustees. For the record, there are special rules for a range of circumstances such as minor children, people under a mental or physical disability, funds with only single members and so on.
But let’s concentrate on the most common scenario – the structure used by our reader. When you have two members in a super fund and you want individual trustees, then the two members must be these trustees.
This means that as individuals, they take on the job of managing the fund – that is, they’re personally liable for anything that goes wrong.
As a result, all fund assets have to be in the name of each trustee. There are some assets (for example, real estate in some State/Territory jurisdictions) that make it difficult to nominate all trustees as owners of a fund asset.
The problem with this structure is that it makes flexibility in the structure of the fund difficult and costly to solve. For example, you might want to add another member of the fund. When this occurs, they must become another trustee and the change in the ownership of each asset must be changed to include that new person.
Or, a trustee might die. When this occurs, the ownership of each fund asset must change. In this situation, a two-member fund with individual trustees will be down to a single member and trustee. This structure would have to be changed and another individual trustee would need to step into the trustee job.
Alternatively, an individual trustee might become bankrupt. When this occurs, they must leave the fund as soon as possible and cannot remain a trustee. We would then be down to a single-member fund again.
And, if the ATO imposes any administrative penalties on the trustees, then each trustee is personally liable for the fine.
None of these problems arise with corporate trustees. In a two-member fund, each member of the fund is a director of the company and there may be no other directors.
When a SMSF has a corporate trustee and there is a change in members – adding or subtracting members – then the only change that has to be made is a change in who is a director of the corporate trustee.
In addition, if there is any legal action against the trustee, then it is the company that is liable for any damages. Action might be taken against a company’s directors if it can be shown they were negligent in their duties.
ATO administrative penalties only apply to the corporation and not to each individual trustee.
It has to be said that a corporate trustee does cost money. There are initial set up fees and a nominal annual ASIC fee (which you can pay 10 years in advance) if the company has the sole job of being a SMSF trustee.
There is only one benefit of individual trustees – they’re cheaper. In fact, they cost the fund nothing. I think it’s for this reason that many people select this option.
For what it’s worth, in our own fund my wife and I use a corporate trustee, which has one job and yes, we paid the annual ASIC fee 10 years in advance several years ago. For some strange reason however, you still have to complete your annual ASIC review and download their nil invoice each year. If you don’t do this then you get a ‘late fee’!
How do you change your trustee structure?
There is only one way to answer this question – review your fund’s trust deed. The deed will specify how trustees are appointed and how they can resign and be replaced. You need to follow the steps in this document. Seeking advice from the lawyer who prepared this document might also be a good idea.
For now, let’s assume you’re moving from individual trustees to a corporate trustee.
Before you begin formalising your decision, approach all the banks, stockbrokers, share registries and property title offices and ask them what evidence they need for the change of the fund’s trustee and how much this change will cost. Some title offices will need a deed executed and may want to charge nominal stamp duty. Some banks will demand that a term deposit must cease (together with relevant penalties) and a new one put in place based on current market prices. Most share registries and stockbrokers will charge a fee for each change they make.
Get all relevant organisations requirements in writing so they don’t try and impose different conditions on you when you actually go to execute the change.
Now, work out the cost of changing from individual to corporate trustees. Let’s assume you have decided to proceed with the change.
First, set the company up assuming it doesn’t already exist.
Next, in most cases, the individual trustees will execute a minute saying that they have decided to resign their trustee role and have decided that the best option for the fund is to have a corporate trustee which has been established for this purpose. This minute should also detail that all necessary administrative steps will be attended to, and who is responsible for doing this work.
These individual trustees will then formally execute a resignation letter in accordance with the fund’s trust deed.
The corporation must then formally accept, in writing, to be the fund’s trustee.
Once these steps are done, all the ownership of all the fund’s assets must be altered. Now, approach all the banks, stockbrokers, property titles offices with the documents they require to make the change.
Each company director should execute the ATO’s trustee declaration [1].
Finally, the ATO needs to be told that there has been a change in the trustee of the fund. There is a formal document to complete available here on the ATO website [2].
Segregating Assets
To understand this topic, I suggest you read an article I prepared in June 2016 explaining this issue [3].
Does a change of trustee mean changes in how assets of the fund are segregated?
Our reader says their fund’s assets are split between each beneficiary (I presume here he doesn’t mean ownership of fund assets but that specific assets have been tagged to each member).
I would be very surprised if moving from individual trustees to corporate trustees had any impact on this structure, assuming it is still preferred, but reference should be made to the fund’s trust deed to be 100% sure.
The trustee structure of the fund should have no impact on how the financial accounts of the fund have been set up. Once a corporate trustee has been appointed, it might be a good idea for that trustee to state in a minute that they have decided to leave the financial account structure of the fund unchanged.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.