We recommend all SMSFs set up a company to be the trustee for many reasons:
- Better protection and administratively simpler to make changes when something changes
SMSF’s don’t stay the same forever. Members might die, new members (e.g. children) might join, the original members might divorce or one or both of the members might be diagnosed with dementia or have an accident that affects their mental capacity and leaves them unable to be a trustee. The good thing about SMSFs is that they can deal with changes in the trustee or directors. When a fund has a company as trustee the change is simple (just some paperwork to lodge) and can be managed by the remaining directors. Where the trustees are individuals, it’s far harder – the legal names on all of the fund's investments have to change to the new group of individuals. Some investments actually have to close as they can’t accommodate a change in name and sometimes there are legal processes to go through which delay the changes and in the extreme make it difficult for you to access some of your fund’s assets for a time.
- Control for single member funds
A fund with only one member can have a trustee that is a company with a single director. But a single member fund CANNOT have just one individual trustee, other than under certain temporary and unusual circumstances. A single member fund with individual trustees has to have at least two trustees in the long run. That means that if you want an SMSF on your own, you can only have complete control over your super if you have a company as trustee.
- Might be the only option for some funds
A fund with five or six members who will all be trustees may not be able to have individual trustees in some states. This is because some states only allow up to four people to be trustees of a trust (and remember, a super fund is a special type of trust).
- Easier to keep personal and super fund assets separate
One of the really important legal rules in SMSFs is that the fund’s assets have to be kept completely separate from the members’ own assets. This is really easy to do and to prove to auditors and the Tax Office when there is a completely separate legal owner – a company trustee.
- Better protection of personal assets
If the fund owns a property, for example, then just like any other property owner the trustees of the fund can be held liable for accidents on their property. If the trustee is a company, then your personal liability is generally limited to the assets held in the SMSF. Assets that you own outside the fund are protected. That same protection doesn’t apply to funds with individual trustees. It’s really just like running a business through a company rather than in your own name.
- Better protection if something goes wrong
Despite best intentions, sometimes trustees break the super rules. In more extreme cases, the Tax Office can issue “administrative penalties” that trustees have to pay personally (they can’t be paid from the fund). The maximum penalty amount is worked out “per trustee” (so per person for individual trustees or per company for a corporate trustee). That means a corporate trustee also gives a little bit of protection when it comes to penalties.
It is initially more expensive to have a company as trustee of your SMSF. There is a set up cost and the company has to pay an annual fee to ASIC (the government body that regulates companies). Neither of these fees apply if you have a group of individuals as the trustee. But all in all, most people would agree that the benefits outweigh the costs.
It’s worth noting that the annual fee is quite low if the company is set up as a “special purpose” company. This is a type of company that is only allowed to be the trustee of a super fund – it can’t do anything else like run a business, be the trustee of a family trust etc.
We also recommend that the company you set up to be the trustee of your SMSF is set up exclusively for that purpose. You might have another company that (say) runs your business or is the trustee of your family trust. Don't use that company as the trustee of your SMSF, set up a new company. Again, there are a few reasons, including:
- Complete clarity
As we mentioned earlier, a core requirement for SMSFs is that its assets are clearly owned by the fund. This can become murky when the owner (the trustee) also owns other assets. This is a point your auditors are required to verify regularly and sometimes providing the necessary proof creates additional work for you.
- Legal protection
If there is a legal threat to the company via its other activities, the SMSF’s assets could be exposed. Even though they should be legally protected because they are, in fact, owned beneficially for the SMSF, simply having to prove it potentially adds pressure to an already problematic situation.
- Control over directorship
SMSFs have specific rules about who can be a director of the trustee company. These same rules don’t apply to other entities. A change in either your SMSF or other entities could put you in a position where the directors make sense for your SMSF but not your other entities (or vice versa).
If you're already a director of a company you will have a special number known as a "director ID". You don't need a new one for your SMSF trustee company - that number is unique to you and you just quote the same number every time you start being a director of a new company. If you don't have a director ID already, read more about them here and make sure you've got yours before you ask Heffron to set up your new trustee company.