Why we recommend a Corporate Trustee

Corporate trustees a must for a SMSF

Over the years we have been asked on countless occasions whether a SMSF should have a corporate trustee and why? Our answer has not changed in the past ten years and is always a resounding ‘yes'. Let's go to the four reasons why a corporate trustee is a must for a SMSF:

•  The Commonwealth Constitution requires it

The Commonwealth of Australia Constitution Act 1900 is the foremost legal document governing how the federal government may or may not use its powers. Any laws that do not fall within the broad realm of the Constitution are to be held invalid – some of the most famous decisions by the High Court in recent years on invalid federal laws include the Tasmanian Dams case and the Mabo decision.

The Constitution has played a big part in the superannuation industry for some time. The reason for this is that the Commonwealth Constitution, laid down in 1900 never foresaw the advent of superannuation. As such the government's desire to regulate superannuation has faced a tortuous track over the years. Until 1986 at least the regulation of superannuation was found in the Income Tax Assessment Act 1936 (‘Tax Act'). As this is one of the specific heads of power allowed under the Constitution, the government was able to regulate superannuation through its taxation laws. Post 1986 and the federal government of the day took superannuation out of the taxation laws and implemented specific laws for regulating superannuation in the Occupational Superannuation Standards Act 1986 (“OSSA”). Following legal challenges to the constitutional validity of OSSA – there is no specific head of power for superannuation; the government had to redraft its superannuation laws through another guise. As such OSSA morphed into the Superannuation Industry (Supervision) Act 1993 (‘SIS Act').

The SIS Act was different from OSSA in that it requires the trustees of a superannuation fund, including a SMSF to make a choice as to whether to have the broad rules found under the Act apply in relation to the fund. Once chosen, the trustee and the fund become regulated – for non-SMSFs the regulator is APRA and for SMSFs it is the ATO. More importantly provided the fund remains compliant with all of the laws under the SIS Act, the fund is able to obtain the generous taxation concessions for trustees and members of the fund under the Tax Act.

The mechanism for making the superannuation laws apply is found in section 19 of the SIS Act. This section is quite specific and will only allow two types of funds to become regulated:

(1)        where the fund has a corporate trustee – using the Constitutional power to make laws regarding corporations; or

(2)        if the fund has individuals acting as trustees, where the sole or primary purpose of the fund is to pay old age pensions – using the Constitutional power to make laws regarding old age pensions.

These laws may not seem important in isolation, but they become important when put in practice. For example, once a member is retired they may not want to start a pension yet, but be provided for by way of a lump sum from the fund. If the fund has individual trustees and the trust deed allows the trustee to pay the member a lump sum, there is a chance that the fund cannot be regulated because its primary purpose should be the payment of pensions not lump sums. In such a fund the only way for the member to access a lump sum is to commence a pension first and then commute the pension on behalf of the member – an administrative nightmare. A large number of SMSF trust deeds require this method of accessing a lump sum.

On the other hand, if the SMSF has a company acting as trustee, a lump sum or pension can be paid to members of the fund when they retire or meet some other preservation condition of release. Although the ATO is yet to enforce this issue, this does not mean that it will not be enforced in the near future. As the Chinese proverb says “the law sometimes sleeps but it never dies.” As such it may be wiser – for all persons seeking to have the flexibility of being paid a lump sum or pension from a SMSF to use a corporate trustee, at least prior to making any lump sum payment.

•  Assets must be in the trustee's name – and trustees come and go

The very nature of a SMSF is that it is a fluid fund. Over time multi generations will find their way into and out of the fund. Parents may allow adult children to occupy membership in the fund under employee choice until such time as the child has enough superannuation and family to commence their own SMSF. Likewise when a member of a fund dies, the executor may be appointed (subject to the fund's trust deed) as a trustee for the short period of time from the death of the member until death benefits commence to be paid to the deceased member's dependants or legal personal representative. In short trustees come and go – this raises a painful administration problem for individual trustees in a SMSF. In that regard the Commissioner has stated in his SMSF publication “DIY Super: it's your money … but not yet” that the trustee must ensure to have all fund assets in the fund's name. In doing this, the ATO prefers the fund's assets to be held in the names of all of the individuals as trustees for the fund. Where members and trustees come and go it can be an administrative nightmare to notify all relevant registers and offices of a change in the name of the assets held by the fund. In contrast, where a new member joins the fund, the corporate trustee will not change only the underlying directorship will change.

•  Pensions are non-rebatable if paid to an individual trustee

Section 19 of the SIS Act provides that, where an individual trustee resides in the fund, the sole or primary purpose of the fund is to pay a pension. However, the irony is that the pension rebate provisions at section 159SM of the Tax Act provide that a rebate applies only to rebatable superannuation pensions. This term is defined in section 159SJ(1) to mean a pension paid from a complying superannuation fund “where the person to whom the pension first became payable is not the trustee of the fund.” As such this means that where the fund provides a pension to a member who is also a trustee of the fund the pension will not be rebatable. The Commissioner has issued a determination on this matter stating that he will overlook the law however the determination is not binding on the Commissioner and it is doubtful whether he has legislative power to disregard the law.

•  Trustee litigation exposure

Where the trustee of the fund is subject to litigation – such as a personal liability action in relation to one of the fund's properties, then the trustees will be jointly and severally liable for any such action. The trustees may be able to recover from the assets of the fund subject to the fund's governing rules and any superannuation laws preventing trustees from being financially accommodated for actions taken as a trustee. In circumstances where there is a corporate trustee any action will be limited to the assets of the company not those of the underlying directors.

Given the above four reasons and in particular the reliance on the Commissioner of Taxation to continue to overlook the lump sum and rebatable pension issue, the safer way for a family to protect their SMSF savings is to put in place a corporate trustee.

Is cost a real issue?

The costs of establishment and the on-going running of a corporate trustee are often cited as the main disadvantage to utilising a corporate trustee for a SMSF. However this is not logical when considering:

•  the potential downsides discussed above where individual trustees are used and in particular the potential foregoing of taxation benefits in the fund and to pension members of the fund;

•  a SMSF should last 100 years or more so there is a need for certainty in terms of trusteeship. Like a SMSF, a corporate trustee will last into perpetuity however an individual trustee will not. As an aside the rules against perpetuities that apply to trusts do not apply to SMSFs;

•  the on-going cost of a superannuation corporate trustee is about $45 per annum for return lodgement with ASIC and as it is a special purpose company with little in the way of assets, accounting costs are minimal;

•  the once off establishment fee for a special purpose SMSF trustee company is approximately $1,435.00 which includes ASIC registration fees. For an entity that is to last a lifetime this is not expensive.

Not all SMSF Corporate Trustees are the same

Once a decision is made to use a corporate trustee the next step is to choose the type of corporate trustee. In that regard there are two types: the ordinary shelf company or the special purpose SMSF trustee company. Since the advent of SMSFs in 1994 ordinary shelf companies have generally been used by accountants, financial planners and lawyers as the basis of a trustee company.

The rules governing a trustee company are found in section 17A of the SIS Act. That section defines a SMSF to include a superannuation fund with a corporate trustee where all members of the fund are directors of the corporate trustee. Moreover only directors of the corporate trustee may be members of the SMSF. For a single member fund this means that, generally, the company that is acting as trustee will have a single director. In limited circumstances, providing the company's rules allow , a replacement director may be made for a member who is incapacitated, deceased or unable to manage their own affairs – such as a minor or person living overseas.

Since the introduction of the director/member rules in section 17A of the SIS Act in 1999, the ordinary shelf company can prove not only dysfunctional but also dangerous. The reasons for this are as follows:

•  Voting power on the Board

The trustee of the SMSF is empowered to make a number of decisions in relation to the fund including, but not limited to:

•  appointment of various professional advisers to the fund including the auditor,

•  establishment of the fund's cash account,

•  setting of an investment objective and investment strategy for the fund,

•  making the investments for the fund,

•  admission of members to the fund,

•  acquisition and disposal of investments pursuant to the investment strategy,

•  approval of and the payment of benefits to a member (including a payment of a pension),

•  approval of and the payment of a death benefit to a dependant or legal personal representative of a deceased member,

•  acceptance of a binding death benefit nomination from a member,

•  review of audit reports,

•  creation of any reserves.

These decisions may impact a member at any time. As such if all directors on the Board of Directors are able to cast one vote each then the majority has power and control over the fund. However this may not be appropriate in the case where there is a three member/director SMSF with the member with the most significant benefits able to be out voted on important issues such as investment strategy by two member/directors with minimal benefits.

There are also serious issues where there is a two member/director SMSF with separated spouses as members. Quite apart from the potential legal fights as to who is remain as a member of the fund, keeping the fund in a working state during separation may prove impossible.

•  The problems of death

As noted above section 17A(3) of the SIS Act allows, subject to the rules governing the trustee company , for the appointment of an executor of the deceased member as director of the trustee company to oversee the distribution of the deceased member's superannuation estate. However if the constitution of the trustee company does not allow the automatic appointment of the executor then the current member/directors hold control over the deceased member's benefits. This may cause conflict in members with multiple marriages where the current spouse is the remaining director and there are children from the deceased's prior marriage as executors or in a position to be looked after by way of death benefits.

•  What happens in the event of incapacity?

Like the death issue above, a fund will remain to be seen as a SMSF even where a person's legal personal representative or a person who holds a member's enduring power of attorney, take the place of an incapacitated member as director of a corporate trustee. However a shelf company constitution does not take into account such an appointment meaning that any such appointment needs to be in accordance with the rules of the trustee company which may be used by other member/directors to ensure the incapacitated member's representative remains outside of directorship.

Introducing Australia 's first true SMSF Corporate Trustee

To date there has been no special purpose SMSF corporate trustee built to take into account the vagaries of a multi member SMSF. Following a review of the GLENISTER & CO SMSF trust deed and its underlying mechanisms to cope with voting powers and automatic appointment of executors and legal personal representatives as trustees of the fund, GLENISTER & CO has created Australia's first special purpose SMSF corporate trustee. Like the GLENISTER & CO SMSF trust deed and governing rules, the constitution of the SMSF corporate trustee provides:

•  Flexible voting power

Unless agreed otherwise in any meeting of the Board of Directors, a director holds the same number of votes as the account balance of the member they are representing. For example in a three member fund with Dad - $450,000 in benefits and his two children – with $50,000 in benefits between them, at any Board meeting Dad would have 450,000 votes and thus control of the fund. Of course this also means that the members with smaller benefits must consider carefully whether to join this fund. The articles in the GLENISTER & CO SMSF Corporate Trustee allow the Board of Directors to create flexible voting rules such as ensuring that the Board holds that only a member's director can vote on important issues dealing with their benefits.

This may be contrasted to the typical shelf company rules where each director has one vote - a rule that doesn't stand up to modern day SMSF strategic thinking.

•  Appointment of legal personal representative

There are numerous instances when a member or deceased member should have a legal personal representative stand in their place as director on the Board of Directors. Such instances include where the member is a minor, incapacitated, overseas or deceased. In these instances the GLENISTER & CO SMSF Corporate Trustee allows the stand in director to be appointed by the member at the exclusion of the other directors of the Board thereby providing safety and security over the member's benefits.

Australia 's first true SMSF Corporate Trustee is available now

The GLENISTER & CO SMSF Corporate Trustee is available now by contacting our office on 03 9457 5577. The pricing of the corporate trustee is $750.00 and includes all relevant constituent documents as well as registration of the company and notification of directors with the Australian Securities and Investment Commission. For an additional $250, the trustee may acquire a broad range of tailored minutes and documents covering amongst other things, important corporate trustee actions such as:

•  making a contribution into the fund, including an in-specie property contribution;

•  creating an investment reserve to smooth investment returns and member benefits in the fund;

•  allocation of earnings amongst fund members;

•  establishing a death benefit nomination policy for the fund – a necessary requirement to enable the trustee to pay a binding death benefit;

•  payment of lump sum retirement benefits;

•  commencement of the payment of a pension from the fund

•  employee choice documentation;

•  payment of benefits in the event of a member's incapacity, whether temporary or permanent.

Finally where a SMSF has a shelf company corporate trustee this may be upgraded to the GLENISTER & CO SMSF Corporate Trustee easily and effectively via a Board of Director's resolution. The cost of an upgrade is $450.

Disclaimer

Please note that this information should not be relied upon for decision making or providing advice without seeking expert opinion. Glenister & Co exclude all liability relating to relying on this information.