04/06/2012

The arguments for a corporate trustee are so compelling and the possible detriments of not having one are so substantial that the adviser will need a very good reason to allow their client to use an individual trustee.

Despite this, the most recent stats from the ATO show that only 25% of funds have a corporate trustee.  In recent years there has even been a noticeable shift away from corporate trustees, with 90% of newly registered SMSFs in the year ended 30 June 2011 established with individual trustees.  Over the three years to 30 June 2011, there has been a 1.5% decline in SMSFs registering with a corporate trustee.  Frankly, this is madness.

The appointment of a corporate trustee

• is cheaper in the long run
• avoids potentially high costs of transfer of assets on change of an individual trustee
• avoids the NSW issue of whether to register the change of trustee deed
• achieves the proper separation of assets
• avoids the possibility of premature vesting when only one trustee/member exists
• avoids the fund being held to be ineligible to qualify as a ‘regulated fund’
  

Consider this: your clients Adam and Bonnie refuse to pay the $600 or so for a corporate trustee.  Five years later the fund owns two business premises, 18 shares packages, 3 managed fund investments and two insurance policies.  Adam dies.

It is the duty of the trustees to ensure the investments of the fund are in their name ("Self managed superannuation funds – securing the assets of the Fund" issued by the Australian Taxation Office).  The auditor must report that this has occurred.  The surviving trustee of the fund or the fund's administrator must now arrange the transfer of all the fund's assets into the name of the surviving trustee.  The tasks and fees connected with these transfers are substantial.  Depending on the value of the assets, the average fees (including solicitors fees) and stamp duty could exceed $4,500.  If they'd used a corporate trustee only a single ASIC form would be lodged – free of charge.

Money saved by not having a corporate trustee is a false economy and advisers should not allow clients to adopt that false economy.

By the way, Adam's daughter Celine is a litigation lawyer who knows nothing of superannuation and stamp duty.  She contacts you to ask why you didn't fully explain to her and her parents the advantages of a corporate trustee that could’ve saved these costs.  When you can't provide her with a satisfactory answer she demands that you pay these costs.

Trustees have a duty as trustees and under the SIS Act to keep assets of a fund separate from their personal assets.  It can be administratively difficult to track personal assets against fund assets.  If you get it wrong the outcome would be disastrous.  A dedicated corporate trustee gets over that problem and the uncertainty.

Corporate trustees also avoid accidental vesting of the fund when one of its two members dies.  Under the rules of equity when the sole trustee of a trust becomes the sole beneficiary of a trust the trust is said to merge, that is, it is no longer a trust. 

Although Section 17A of the SIS Act appears to address this by allowing a single member/single trustee fund to continue for a short time, it is simply for the purposes of the fund’s compliance relating to tax concessions and does not bind third parties.

A SMSF that has had only one individual trustee at any time may find itself under challenge if the fund is involved in any court action whether it is in the family court, the resisting of a bankruptcy of a member, challenging a tax assessment, contesting an investment that has gone wrong or in other circumstances where the protection by the SIS Act of the fund’s tenure may not be enough.

SMSFs should also use a corporate trustee in order to avoid a constitutional challenge.  Commonwealth regulation of private superannuation is achieved under the Commonwealth's 'trading or financial corporations' power and 'old age pension' power.  S.19 of the SIS Act sets out the requirements for a regulated fund which includes either that the trustee be a constitutional corporation or that the rules provide as the sole or primary purpose the provision of old age pensions.

If the trustee of the fund is an individual then it fails the first requirement and therefore must meet the second requirement in order to be eligible to be considered a regulated fund.  If a court at the request of an adversarial third party found that the sole or primary purpose was not old age pensions, then the fund could be held to be not capable of being a regulated fund under the Act and therefore to be non-compliant and not eligible for tax concessional status.

Finally, in NSW SMSFs with individual trustees face issues under the Trustee Act. There is uncertainty about whether, in NSW, in order to be valid, a deed which appoints a substitute or additional trustee, or retires a trustee, must be registered.

The ATO's view is that a deed of appointment of a new trustee should be registered where the changes to the trustee structure of the superannuation fund are being made under the NSW Trustee Act, because the trust deed is silent on the issue, or, if the changes are authorised by the trust deed, where the deed requires it.

The ATO’s stated view does not bind the ATO nor any third party who may want to challenge the validity of the fund under general trust law.

How to avoid all this uncertainty? Use a dedicated corporate trustee that never needs to be changed.  You will not only be protecting your client but also potentially yourself.

If you have any questions in relation to this article, please contact TOWNSENDS BUSINESS & CORPORATE LAWYERS on (02) 8296 6222.