August 20, 2010

5 reasons why you need a company as trustee for your SMSF

By Kris Kitto

And why 90% of people who set up a SMSF get it wrong!

There are 5 main reasons why you should use a special purpose PTY LTD company as trustee for your SMSF:

  • Administrative efficiency
  • To have a single member fund
  • Ability to pay lump sums rather than just a pensions
  • Access to the 15% pension rebate
  • Liability protection

Administrative efficiency:

One of the key concepts with a SMSF is that all members must also be trustees.  Another key concept with a SMSF is that assets and investments of the SMSF must be kept separate from those assets of the trustees.

This means when you have individual trustees of a SMSF, each investment should be owned as follows:

John Smith & Jane Smith ATF (as trustee for) Smith Super Fund

OK – seems easy enough right?  What happens when a new member comes into the SMSF?  They also have to become a trustee of the fund. Using the previous example if John and Jane’s daughter Sarah became a member of the fund, all the investments would now have to be registered as follows:

John Smith & Jane Smith & Sarah Smith ATF Smith Super Fund

In some cases making this change may not be too difficult – filling out an extra couple of forms with your bank and share broker and viola – they change it!

However, in reality it is never that simple.  In fact, I would go as far as saying that it is an administrative nightmare – and that is a situation when a change of trustees is made out of choice – rather than a forced change of trustees.

So when does a forced change of trustees occur? The most common time is when one of the trustees dies.  Unlike a family or discretionary trust, when a SMSF has individual trustees, it has to have at least two individual trustees – it can’t be a single person.

Continuing with Mr and Mrs Smith, if John Smith passed away unexpectedly, his widow Jane would have to find another person to act as trustee and then set about contacting every bank, share registry, fund manager and even engaging a lawyer to handle the update the titles of any properties owned by the SMSF.  Do you really think Jane is wanting to be doing this after just losing her husband? Probably not.

Enough of the sob stories – the key point to understand is that sometime during the life of a SMSF the members will change – meaning if you have individual trustees the trustees will also change!

By comparison if you want to add a new member to a SMSF with a corporate trustee, you simply add them as a member, have the sign the normal declaration form and then they simply become a director of the corporate trustee – which is one form with ASIC that can be completed online in about 5 minutes!

No bank accounts need to be changed. No share registries notified. No drama dealing with state revenue offices or titles offices. The process is simple and clean.

Single member SMSF:

To be able to have an SMSF with only one member, you either need to add another person as a non-member trustee, or have a company as trustee.

If you have an additional individual trustee who is not a member, they will have the burden of having to sign off on all the accounts, tax returns and trustee minutes – they also have full access to all the information and investments of the fund.

This may not be a problem as it is likely that you would appoint a person you trusted such as a parent or other family member – but is that person always going to be there? What if they move overseas or you have a falling out with them?

The only sensible way to go if you are looking to set up a single member SMSF is to use a corporate trustee – I should know, this is how I did it when I set up my SMSF!

Lump sums:

Technically under the laws that apply to SMSFs for a fund to pay a lump sum to a member, it needs to have corporate trustee – otherwise it is restricted to only paying members’ old-age pensions.

Now, as it stands at the moment the ATO do not actively police this issue – however this may change and all SMSF members need to be aware of this technicality.

15% pension rebate:

Similar to the technicality on lump sums, when a person who is under age 60 but over their preservation age (i.e. at least 55) they are still taxed on their pension when they receive it – however provided they have a corporate trustee they are entitled to a 15% rebate on that income.

This is important because if you are on a marginal tax rate of 30% and you receive a 15% rebate on your pension income, you are halving your tax on that income.

Liability protection:

SMSFs have the ability to invest in a range of assets – with one of the most popular being property (either directly or via an instalment warrant).  However, with property there is always the potential for something to go wrong and for the trustees to become liable for any damages.

This means the other assets held by the individual trustees personally may be at risk. A corporate trustee adds another layer of legal protection and protects the individual members.

This is also the reason why a separate special purpose company should be used as a trustee – rather than a company that is used in a business of one of the SMSF members.  For example, if you operate a business via a company, and that company gets into financial strife, creditors such as banks or even the liquidators will try to get their hands on any and all assets in the name of that company – including those that actually belong to the SMSF.

This is a key reason why the ATO is very diligent about ensuring assets of an SMSF are kept separate to those of the members themselves and also any related businesses or companies.

Summary:

The reasons to use a company as trustee are compelling – however you are probably now thinking what is the catch? How much is this going to cost me?

It is not going to cost you as much as you think.  A few years ago ASIC halved the cost of incorporating (registering) a new company from $800 to $400. From 1 July 2010 the fee is $412.  So to set up the company to act as your SMSF trustee will cost you $412 plus the costs of professional fees and the company constitution (rules of the company – sometimes also know as the ‘memorandum of articles’) which typically range between $99 and $500 dollars – depending on the provider and the quality of the documentation and service provided.

So on average to set up the trustee company will be around $700.  Some providers will package the SMSF set up with the trustee company set up for less than $1,000 – however you really do get what you pay for and a generic company constitution is definitely NOT the way to go.

The ongoing cost of keeping your company registered is only $41 per year.  You need to advise ASIC of any changes to the company – including changes of directors (i.e. new members) and changes of addresses – this can all be done online with ASIC and is very simply.

If you already have an SMSF set up and you are operating with individual trustees, changing over to a corporate trustee is relatively simple.  It will cost you a few hundred dollars with a lawyer to have the necessary documentation prepared.  There are even some online providers who do it at a very reasonable cost.

What now?

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Already have a SMSF with individual trustees?

If you are one of the majority of people who have set up a SMSF with individual trustees, putting in place a special purpose SMSF trustee company is easy.

Change a company to a special purpose company

  • the company only can be used as the trustee for your SMSF after the change
  • the company has to cease to trade or act as the trustee of other entities after the change

What is needed for SMSF trustees to change a company to a special purpose company

  • lodge 484 (form 484-B3 to be precise) form with ASIC (accountant or agent can do this)
  • prepare legal minute to document the change
  • update the constitution of the company to ensure it’s suitable and it aligns with the rules of the SMSF trust deed (optional but strongly recommended)

Fees charged by ASIC for changing a company to a special purpose company

ASIC does not change any fees. Also there is no late lodgement penalty applies so you can back date the change date. However,  penalty and late fees will apply if you change other details and the 484 form is not lodged with 28 days after the change, for example the registered office address for the company or director details.