More than 90% of self-managed super funds (SMSFs) set up in recent years use an individual trustee structure, Australian Tax Office data shows. But while it’s the most popular option by far, it’s not necessarily the wisest choice for running your fund.
It’s difficult to know precisely why some people elect this option instead of a corporate trustee, but I suspect some people are keen to keep costs down and, in their own mind, can’t see the benefits of using a specially created corporate entity to act as trustee of their SMSF.
I spend considerable amounts of my life working with SMSFs and I see a wide range of problems with individual SMSF trustees.
The problems with individual trusteeship
The first problem is asset ownership. All super fund assets must be in the name of all trustees. Ideally, the investments will be held in a name structured like this: “Mary Jane and Robert James Smith as trustees for the Smith Superannuation Fund”. The reason for denoting official asset ownership in this way is to avoid confusion. When an auditor checks over the fund each year, they are expected to confirm that this has been done and demand that errors are fixed.
Every time a member of a fund with an individual trustee retires, dies, loses capacity, leaves the fund, or a new member is added to the fund, the trustees are required to correct the ownership of the investments.
If your fund has many investments, then a change in the fund’s membership will take considerable time and effort as well as incur considerable cost. All share registries, banks and managed fund providers need to be advised of the change. And changing these details for real estate causes considerable hassle and cost.
Our second problem involves trust law. When a member leaves an SMSF, it may cease to be a trust because a trust doesn’t exist when the sole trustee is also the sole beneficiary. The super laws cater for this problem by demanding that there must be at least two individual trustees, and they allow six months to fix this problem. However, this six-month timeframe doesn’t solve the problem that under trust law a trust may have ceased to exist.
The third problem is the death of a member. Sometimes with individual trustees, almost insolvable problems are created that effectively stall the SMSF. A good example of this is the Katz vs Grossman case, which we’ve highlighted before, involving a deceased father’s SMSF and the distribution of his super assets. Mr Katz and Mrs Grossman were son and daughter of the deceased. I’ll have more to say about this case in another article.
The benefits of a corporate trustee
By using a corporate trustee, you’re less likely to mix your non-super and super assets together. This final problem is quite common with individual trustees.
You might look through this list of potential problems and conclude that they’re unlikely to ever happen to you and your SMSF. Fair enough. I’m sure people who have fallen prey to some of these issues might have had similar thoughts.
For what it’s worth – most of these problems don’t exist for corporate trustees and some of my colleagues earn a handy revenue stream from fixing many of these problems for individual trustees.
From a purely mercenary point of view, I suspect that some super lawyers think individual SMSF trustees are a great idea. From a professional point of view, however, I’m yet to meet anyone who recommends this option to their clients.
One submission to the Cooper Review recommended that all super funds, especially SMSFs, should have to use a corporate trustee. I very much agree with this sentiment. Unfortunately, the Cooper Review and the Government decided that individual trustees should continue to be allowed.
If you now think that you should convert your fund to a corporate trustee, please be aware that it can incur legal and administration costs. There are also a number of steps you must go through. I’ll address these issues in my next article.
Important information: 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. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.