SELF-MANAGED SUPER FUNDS (SMSF): WHY YOU NEED A CORPORATE TRUSTEE
Do you know the SMSF rules?
Self-managed super funds (SMSFs) provide a level of financial control that appeals to many people, particularly as retirement draws closer. But if you have an SMSF, or you want to set one establish one, there are several issues you need to know about before they become a problem.
Individual vs corporate trustees
SMSFs require trustees to manage them. An SMSF can be set up with either an individual or a corporate trustee structure. Both structures have their advantages and disadvantages.
Why are individual trustees vulnerable?
The name suggests individual trustee SMSFs would be controlled by just one person. However, the law actually states that SMSFs set up with an individual trustee require at least two trustees to comply. A single member fund is allowed. This is only possible if there are two individual trustees managing the fund or if a corporate trustee is appointed.
That’s no problem if say, you and your partner want to set up an SMSF. You both become individual trustees and members of the fund. However, the role of a trustee of an SMSF is onerous and non-compliance can be costly. For example, if the fund breaches the borrowing provisions, the trustees may be served with an administrative penalty $12,600. However, both trustees would be liable to pay this penalty – a total of $25,200. Would you be able to find someone who would take on the role of trustee knowing they would not be absolved of responsibilities in the event of a breach? If the fund has a corporate trustee structure the penalty only applies to corporate trustee (a total of $12,600). The directors of the corporate trustee can share this penalty.
As a single member of your own fund, we assume you would wish to make decisions that affect your retirement on your own. If you have an individual trustee structure with two individual trustees but you are the only member, would you want to share the decision making about your retirement nest egg with another party?
Why are corporate trustees safer?
Having a corporate trustee may cost a bit more to set up and there are costs to lodge an annual return. However, these days with online company establishment, the costs are very reasonable. In the long run they can save you a lot of time and effort, particularly with administration tasks.
If your fund has individual trustees, the investments of the fund are owned in the name of the individual trustees. Let’s say John and Mary Allan were trustees of the Allan Family Super Fund. If there was a change in individual trustees the ownership of the investments would need to be updated. This could happen if one of the current trustees passed away, or a new member joined– This would require a lot of administrative work, particularly if the fund held shares or investments directly.
On the other hand, if the fund has a corporate trustee, the investments are held in the name of the company. Let’s say Allan & Co Pty Ltd was trustee for the Allan Family Super Fund. The directors of the company may come and go, but there would be no need to amend the ownership of any investments.
If there were two members and one passed away, it would be fine to have only one director of a corporate trustee. So it would not be necessary to appoint another director in order to continue to manage the fund compliantly.
When to seek expert advice
If your parents have an SMSF, you may not know how the trustee structure has been established. You may not be aware of who the other trustees are. These issues can be difficult to discuss with family members. However, starting conversations early could save time and money.
It’s crucial to get the right advice from an experienced financial planner. They can look closely at your situation and help you make the best possible financial decisions. To make a time to discuss your SMSF, get in touch with the Milestone Financial team today on (02) 6102 4333.
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