SMSFs with sole-purpose corporate trustees – that is, acting in no other capacities – have been touted as superior for many years. While the ‘old’ reasons for using corporate trustees rather than individual trustees still ring true, recent legal news and ATO policy make it timely to revisit the question.
Statistical reality
Despite any benefits in having corporate trustees (in particular, sole-purpose corporate trustees), only a minority choose to use them. The ATO, in its SMSF statistical overview for 2011/12, stated that almost 76 per cent of all SMSFs had individual trustees rather than a corporate trustee. Further, that percentage appears to be increasing, with the ATO stating:
. In the three years to 2013, there was a 1 per cent decline in SMSFs registering with a corporate trustee; and
. Approximately 90 per cent of newly registered SMSFs in 2013 had individual trustees. Despite this overall trend, there are new and non-intuitive reasons to consider sole-purpose corporate trustees as a strategic advantage.
Despite this overall trend, there are new and non-intuitive reasons to consider sole-purpose corporate trustees as a strategic advantage.
SMSF penalties legislation
The SMSF administrative penalties rules (Tax and Superannuation Laws Amendment (2014 Measures No. 1) Act 2014 (Cth) became law on 1 July this year. While commentary has so far focused on the punitive aspect, there are hidden strategic planning points to note.
In particular, the scheme imposes a penalty on a person who contravenes a particular provision. A person’ is defined as either a trustee or a director of a corporate trustee. What is clear on reading the actual text of the various contraventions is that several of the penalised contraventions demand compliance from each trustee. For such a contravention, each individual trustee would be liable to their own separate penalty as opposed to a corporate trustee, who would receive only one penalty.
Two examples in the explanatory memorandum illustrate this point In the first example, Stuart and Alison directors of the corporate trustee, fail to ensure that accounts and statements are prepared for their SMSF and the corporate trustee receives a 10 penalty unit fine (currently $1,700). The next example has two individual trustees, and each becomes liable to a penalty of 10 units.
Section 84 (in-house asset rules) and section 34 (operating standards) in the Superannuation Industry (Supervision) Act 1993 (Cth) (SISA) are some of the other provisions couched in the same language of each’ trustee having obligations. And while section 34 is a single provision, it imports many superannuation provisions into the penalties ‘net’.
In addition, the new penalty regime makes corporate trustees even more attractive for singlemember SMSFs. Because the definition of an SMSF broadly gives the option for the trustee to be either two individuals or a sole director corporate trustee, the corporate trustee option allows for the non-member trustee to remove themselves entirely from SMSF administration, penalties and general law trustee obligations.
In short, having a corporate trustee instead of individuals can mean fewer heads on the chopping block, since a company is technically only one trustee. In the case of two, three or even four individual trustees, there is more at stake than needs to be.
Keeping assets separate
The ATO, in its SMSF statistical overview for 2011/12, stated that the ‘separation of assets contravention. is the third most commonly reported contravention. While it is non-intuitive, simply having a sole-purpose corporate trustee can usually sidestep the problem.
How does it do this? Earlier this year, the ATO released ATO ID 2014/7. Although the decision involves a relatively rare situation, the ATO makes a broad statement that “an SMSF… is required to keep its assets and money separate from that of other entities”.
This makes the law sound very broad. However, the main part of the rule only says that a trustee must keep the SMSF’s money and assets separate from money and assets held by the trustee personally. If an SMSF with individual trustees mingles its money with the members’ personal money, this is a contravention. But if the SMSF had a sole-purpose corporate trustee, the same contravention would not occur because the corporate trustee has not mixed its money with any personal money it has, Indeed, as a sole-purpose company, it should not even have any personal money.
Other reasons
There are other reasons to have a sole-purpose corporate trustee:
. A corporate trustee cannot die and offers better continuous succession. If individual trustees change or one dies, administrative hassles can result, such as having to update ownership documents. If real estate is involved, it is then up to the trustee to show the revenue office that no duty should be payable as a result of the change of trustee. Further, in the case of a sole-member fund with two individual trustees, if one dies, the fund cannot remain an SMSF indefinitely.
. If an SMSF with individual trustees has a limited recourse borrowing with a bank, the bank may insist on new documents being signed if any individual trustees are added or removed. Further, in some cases, a corporate trustee may be required for the bank to agree to lend.
. The admission of a new member to an SMSF usually also means admission as a trustee, with the same troublesome administration required. Arguably, adding a director to a company requires less overall effort.
. Sole-purpose corporate trustees offer greater asset protection in the case of an SMSF in debt. For example, if an SMSF trustee issued and a large debt results, individual trustees have their personal assets at stake if the SMSF assets are insufficient. In contrast, a corporate trustee is a separate legal entity and offers better protection.
Implementation
For SMSFs implementing a solepurpose corporate trustee, a concessional annual ASIC fee can apply (currently about 19 per cent of the usual normal proprietary company fee). However, advisers and company directors must be wary of special eligibility requirements. First, it must be that the sole purpose of the company is to act as the trustee of a regulated superannuation fund. Second, the constitution of the company must prohibit distribution of the company’s income or property to its members. Accordingly, it is not the case that any old constitution’ is suitable.
