A good place to start when setting up a self-managed super fund (SMSF) is at the beginning. Perhaps legalistic, dry trust deeds make people gloss over this crucial first step.
But by paying attention to it, fund members can avoid headaches down the track. The trust deed governs what you can and cannot do and outlines the SMSF’s legal framework and trustees’ obligation and responsibilities.
The choice is simple: either fund members can act as trustees, or a company becomes trustee. An individual trustee structure is less expensive to set up and run, but it has important disadvantages.
Andrew Yee, a director at HLB Mann Judd, says the vast majority of SMSFs go down the individual trustee route.
“This is at odds with SMSF industry professionals, who overwhelmingly favour corporate trustees as they are more flexible and administratively efficient, especially when there is a change in membership and upon the death of a member,” he says.
It is common for a couple to set up an SMSF with themselves as trustees but should one partner die the fund is no longer compliant.
“A single-member super fund must have two trustees,” says Yee. “If one dies, another person has to be appointed whereas, with a corporate trustee, the company never dies, it keeps going. It’s just that one director has died and it can continue on as a single member, sole-director fund.” Extra set-up and ongoing costs may be a barrier, says Yee.
“It costs $1000 to $2000 to set up a fund with individual trustees whereas a corporate structure will add another $1000 to establishment costs.” SMSF specialist Monica Rule says it can be a hassle when individual trustees change.
“All assets of the SMSF must be held in the names of all individual trustees. If there is a change in individual trustees, the ownership documents of the assets need to be reregistered.
“Every time an SMSF member leaves the SMSF, the remaining individual trustees need to engage a solicitor to prepare relevant documents. The documents must formally remove the departing trustee and change the ownership of all SMSF assets.
“With a corporate trustee, all assets belonging to the SMSF must be in the name of the corporate trustee as trustee for the SMSF. If there is a change in directors of the company, the ownership documents of assets do not need to be changed. This is because only the directors have changed and not the company.”
A corporate structure has extra ongoing costs and paperwork, which aren’t that onerous, says Yee.
“ASIC issues you with an annual statement and invoice to pay. You don’t need to prepare annual company accounts or file annual returns. Because it’s a trustee-only company, there’s not that extra compliance that you have with a full-blown operating company.”
There are other advantages of having a corporate structure, says personal finance commentator and author Noel Whittaker – namely, asset protection.
“An individual who acts as trustee exposes their personal assets to risk if they incur any liability as trustee of an SMSF. For example, if the SMSF owns a property and a personal injury claim is made against the owner of the property, then all assets of the individual owner are at risk to meet that claim.”
There is also less risk of mixing the assets of individual members and the SMSF, which is a breach of the regulations, says Whittaker.
Yee recommends people think about what they want to achieve.
“If you are looking at property, it’s best to have a corporate trustee. Most lenders will not lend to individual trustees … Banks want to keep it clean so there’s no ambiguity in who is the owner, who is the borrower.
“People appear to look at the short-term cost savings … with individual trustees, rather than the big picture advantages of having a corporate trustee.”