There are significant advantages in using a corporation as trustee of your SMSF but for some reason this has never taken off.
According to the ATO data, the vast majority of SMSFs (75% at June 2012) use individual trustees. For SMSFs established in the 2011/12 financial year the ATO says over 90% of these funds elected to use individual trustees.
Cost factors
I suspect one of the primary reasons people don’t want to use corporate trustees is the perceived cost. It costs money to establish a company as well as having to pay the annual regulatory fee to ASIC. For many, the benefits of using a trustee company probably don’t seem to justify the costs.
Sadly I have heard some SMSF administrators claim that corporate trustees are unnecessary and ultimately just add administrative hassle and cost.
But for some SMSFs the benefits could outweigh this apparent expense. Corporate trustees provide a level of certainty and simplicity that individual trustees can’t provide. Corporate trustees also provide a level of control not available with individual trustees.
And, if you are looking to buy an investment property and borrow through a limited recourse borrowing arrangement, most banks will lend more money to an SMSF with a corporate trustee than a fund with individuals as trustees.
I have seen many cases when the use of individual trustees has caused a lot of unnecessary stress when there has been a sudden, unexpected or unforeseen change in the membership of an SMSF, which has altered the trusteeship of the SMSF. When this occurs, the ownership of all the SMSF’s assets has to be changed.
Understand the risks of an individual trustee
Our job as trustees is to run our super fund well and minimise risks where possible. Problems with individual trustees typically arise with death, disability and disputes between family members. We never know what the future holds so we need to cater for one of these events occurring.
An added problem with individual trustees is that in some cases personal assets easily get mixed up with super fund assets. The super laws are quite strict in demanding that your personal assets and your super fund’s assets are kept very separate. The Tax Office recently addressed this and said, “the easiest way to comply with these rules is for your fund to have a company set up solely for the purpose of being the corporate trustee of the fund. If there is a change in directors of the company, you don’t have to change the name on the ownership documents for each fund asset as the trustee of the fund is still the same.”
The cost of running a corporate trustee is not as expensive as you might think. It can be as little as $100 per annum for 10 years as I’ll show you.
How to set up a corporate trustee
So what’s the right way to set up a corporate trustee for your SMSF? Firstly you will need a written constitution for the company. It’s technically possible to set up a corporation without a written constitution but the Corporations Act specifically says that a special purpose company needs a written constitution.
There are many organisations in the market that can help you set up your SMSF trustee. The rough average market price for either corporate structure is $700. It pays to shop around as there are some organisations that charge more. Almost $500 of the set up cost is paid to ASIC.
If you don’t set up a special purpose corporate trustee then the annual ASIC fee is $230 per annum. The total cost is therefore $3,000 over 10 years or $300 each year. That’s the $700 plus $230 multiplied by the 10 years.
On the other hand, a special purpose company’s annual ASIC fee is $43. So the total cost is reduced to $1,130 over 10 years.
However you can pay the ASIC fee 10 years in advance for $324 or $32 per year. Our total cost is just over $1,000 for 10 years or $100 per year.
In my view the special purpose company paying the annual ASIC fee 10 years in advance is a bargain.
I accept that changing your current SMSF trustee from individual trustees to a corporate can be a hassle, (I’ll discuss some of these issues in the near future) but the benefits in terms of security could be well worth it.
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.
Also in the Switzer Super Report
- Peter Switzer: A bout of indigestion [1]
- Paul Rickard: SMSF property loans – how do the banks compare? [2]
- Lance Lai: The S&P/ASX 200 – how long will the bull play out? [3]
- Penny Pryor: Woodside, Coca-Cola, BlueScope end week up on results [4]
- Rudi Filapek-Vandyck: Weekly broker wrap – Coca Cola, Drillsearch and Echo Entertainment upgraded to buy [5]