Practical advantages
of an SMSF corporate trustee
The report - A statistical summary
of self-managed superannuation funds (SMSFs) - released as part of the
Cooper Review in April 2010, disclosed that over 70 per cent of SMSFs have
individual trustees. Further, the report revealed that in recent years
nearly 90 per cent of SMSFs have been established without a corporate
trustee. These statistics start ringing alarm bells, considering the great
advantages that flow from having a corporate trustee.
The high rate of SMSFs with
individual trustees is probably due to the perception that individual
trustees are cheaper than corporate trustees. However, we believe that
individual trustees can prove more expensive in the longer term.
Liability advantage
Many SMSF trustees overlook the
potential liabilities that may arise in relation to their role. We all
realise that accidents can happen which may expose individual trustees to
substantial damages, even when they invest in what appears to be safe
'bricks and mortar'.
DBA is aware, for instance, of an
SMSF with individual trustees that invested in a property development that
suffered a number of problems, and has the potential to not only wipe out
their entire super savings but also result in claims against the trustee's
personal assets.
Another recent example of an
unexpected personal liability arose in Dick's case (Giovenco v Dick [2010]
NSWDC 4). In this case, Dick owned a property in Darlington, NSW. He
engaged Stephens, a plumber, to decommission a solar hot water system on
the roof and replace it with a new gas system. In carrying out this work,
the plumber did not arrange for the disconnection of the electricity to
the old system. Three years later, a handyman was fatally electrocuted
while working on the old system on the roof.
The court awarded $350,000 in
damages to the de facto partner of the deceased. Of this amount, Dick was
ordered to pay 20 per cent and the plumber to pay 80 per cent, or
$280,000. The plumber was held 80 per cent liable primarily because he
failed to notify Dick that he should have arranged for a licensed
electrician to disconnect the electricity when the plumber decommissioned
the old system.
The above case highlights that
personal liability can easily affect individual trustees, and also
highlights the attraction of corporate trustees.
A corporate trustee will provide
individuals associated with the fund with the peace of mind that relates
to limited liability. Namely, liability will be limited to the company and
the director's personal assets will not be exposed. However, a director
that incurs a debt in the name of the company without having a reasonable
basis for its repayment can be subject to personal liability.
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Administrative
efficiency A
corporate trustee also gives single member funds the flexibility to be
controlled by one individual who can be the same sole director/shareholder.
In comparison, a single member fund with individual trustees still requires
two individual trustees.
Corporate trustees also provide an
SMSF with other administrative savings. For example, if mum and dad were
individual trustees and wanted to add (or subtract) a child as a member of
their fund, they would generally require a deed of change of trustee and
transfer all fund assets into the joint names of the three individual
trustees. If they, instead, had a corporate trustee of their SMSF, they
would only be required to add (or subtract) their child as a director.
Naturally, this is a much simpler and efficient process.
Estate Planning
Another benefit of corporate
trustees relates to estate planning. Smoother succession planning can be put
in place so that a successor director can more readily step in for a
director who dies or loses capacity, eg, who suffers a coma after an
accident. Otherwise, the interests of that person may be entirely in the
hands of the other director (who may be the second spouse).
In comparison, costly paperwork is
required to change individual trustees upon the death or loss of capacity of
an individual trustee. This is on top of the considerable paperwork that is
usually associated with administering a person's estate and obtaining
probate of their will, etc.
Conclusion
Corporate trustees are recommended
as a better and more efficient method than individual trustees. Moreover, a
sole purpose corporate trustee is preferred, as this overcomes the risks
that may relate to the company's other activities and obtains the lower
annual Australian Securities and Investment Commission fee of $42 (compared
to $226 pa for an ordinary company).
Daniel Butler and Nathan Papson
- DBA Lawyers
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