Sole purpose corporate SMSF trustees have been touted as superior for many years. While the ‘old’ reasons for having one still ring true, recent legal news and ATO policy make it timely to revisit the question.
Statistical reality
In spite of any benefits in having corporate trustees (and in particular, sole purpose corporate trustees), only the minority choose to use them. The ATO in its SMSF statistical overview for 2011–12 stated that almost 76% of all SMSFs had individual trustees rather than a corporate trustee. Further, that percentage appears to be decreasing, with the ATO stating:
• in the three years to 2013, there was a 1% decline in SMSFs registering with a corporate trustee; and
• approximately 90% of newly registered SMSFs in 2013 had individual trustees.
Despite this overall trend, there are new and unintuitive 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)) have formally become law, with the penalties component starting from 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. This seems to mean the scope of the law is to enforce a penalty on any relevant entity. However, 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, which would receive only one penalty. Two examples in the explanatory memorandum illustrate this point exactly. In the first example, Stuart and Alison fail to ensure that accounts and statements are prepared for their SMSF. Because Stuart and Alison are directors of the corporate trustee, the corporate trustee receives a 10 penalty unit fine (currently $1,700). Stuart and Alison as directors are jointly liable for the single penalty under the new law. The next example is the same except for having two individual trustees. In that example, each of the two trustees becomes liable to 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. Additionally, while section 34 is a single provision, it imports many provisions into the penalties ‘net’. For example, regulations 6.17 (restrictions on payments and cashing of benefits) and 7.04 (age and employment-related restrictions on contributions) of the Superannuation Industry (Supervision) Regulations 1994 (Cth) can be penalised because section 34 brings them into the scope of the law.
In addition, the new penalty regime makes corporate trustees even more attractive for single-member 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 there 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 unintuitive, simply having a sole purpose corporate trustee can usually sidestep the problem. This is explained below.
Earlier this year, the ATO released ATO ID 2014/7, the latest addition to the Commissioner’s material on this topic. The interpretive decision is not overly helpful for most SMSFs since its facts hinge off a standard employer-sponsor. These are quite rare in practice. Nevertheless, the ATO do make 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, one must consider what the law actually says. In fact, the main part of the rule only says that a trustee must keep its money and assets separate from money and assets ‘held by the trustee personally’. Accordingly, if an SMSF with individual trustees mingles its money with the members’ personal money, this is a contravention. This is because money that the trustees held personally (as members) was mixed with SMSF money. On the other hand, if the SMSF had a sole purpose corporate trustee (i.e. it acts in no other capacities), the same contravention would not occur because the corporate trustee has not mixed its money with any personal money it has. Indeed, because it is a sole purpose company, it should not even have any personal money (only SMSF money).
This is another hidden reason to have a sole purpose corporate trustee.
Other reasons
The above reasons serve to bolster the existing reasons to have sole purpose corporate trustee. Other reasons include the following:
- 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 a 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 is sued 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 sole purpose corporate trustee, a concessional annual ASIC fee can apply (currently around 19% of the usual normal proprietary company fee). However, advisers and company directors must be wary of special eligibility requirements. Firstly, it must be that the sole purpose of the company is to act as the trustee of a regulated superannuation fund. Secondly, 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.
This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional. If you wish to discuss this matter further please do not hesitate to contact our professional and qualified staff.
By David Oon, Lawyer, DBA Lawyers