7 Reasons why you should have a corporate trustee vs individual trustees for a self managed super fu
One of the most commonly asked questions we're asked when clients are setting up self managed super fund is whether they should have a corporate (company) trustee or individual trustees as the trustee/s of their self managed super fund.
Before we answer your question, let's take one step back.
When setting up a self managed super fund, you have to decide whether you have a corporate (company) trustee or an individual trustee. With a SMSF, you can have up to four members. So, if you have a family fund with four members, all four members must each become trustees of your super fund. If you have two members, both members must be trustees of your super fund.
The other alternative is that you can opt to have a company act as the trustee of your self managed super fund. If you decide to have a company trustee, all the members of your SMSF must be directors and all directors must be members. So if you had two members, then only those two members can be directors of your trustee company.
While there are advantages to being an individual or company trustee, our Sydney accountants believe that there are 7 reasons why having a corporate trustee is by far the better way to go.
1. The most important point is for asset protection
If individual members were the trustees of your self managed super fund, the legal ownership of the assets are the members. This can create some problems. How? Well let's say that you buy a residential or commercial property inside your super fund and one of your tenants falls over and injures themselves. The tenant can turn around and sue the legal owner of the property which would be the individuals as trustees. And as individuals your personal assets, being your family home and other assets are at risk of being taken away from you. However, if you had a company acting as the trustee, the legal ownership is that of the company not the individual members. The tenant can't sue you as a director of a trustee company.
2. Individual trustees can only pay out retirement pensions
If you have individual trustees, you can only pay out retirement pensions. If you're intending to point pay out lump sum benefits, death benefits, disability benefits or transition to retirement pensions, which are stand out features of a self managed super fund, you're limited as to how you can pay these benefits out to members and beneficiaries of all members which can be very costly. You must have a corporate trustee to be able to pay out these benefits.
3. Increase individual land tax liabilities
With self managed super funds now able to borrow money to buy residential and commercial properties, property investing inside super has seen a dramatic increase. If you have individual trustees who are then the legal owners of the property, this will increase the amounts counted towards their personal land tax threshold, where as if the trustee was a company, the land tax is applied to the super fund.
4. Lower loan to value ratio's
Whilst we're on the topic of borrowing money to buy property in a self managed super fund, banks will lend more money to super funds with company trustees than they would to super funds with individual trustees, which means that your fund can leverage higher priced properties or require less money to invest in property.
5. Longevity
A self managed super fund is designed to allow it to run forever, unlike other trusts such as family trusts that have a life span of 80 years. In order for your fund to last and be passed down from one generation to another, you need a trustee that doesn't die. The only structure that can do this is a company, so if you want your SMSF to last forever and to get passed down tax effectively from generation to generation, you must have a company trustee.
6. Administrative ease
All assets purchased in a self managed super fund must be purchased in the name of the trustees. The problem here is that if you have a family super fund, members come in and out of the fund. For example members die, they get married, divorced, children can come in and out of funds depending on their life stage. Every time a member enters or leaves the fund, if you have individual trustees you have to continuously change the name of the bank account, asset registers and so on. It can be extremely frustrating, time consuming and a very costly exercise. Can you imagine if your fund had 50 direct shares, exchange traded funds and property? However, if you had a company trustee you don't have to change anything because the owner will always be the trustee company. All you have to do is add or remove directors, which is a lot less painful.
7. Estate planning
Lastly, if a member dies or becomes mentally incapacitated and the trustee is an individual, this can cause significant issues for the fund. The fund can be put in a situation where it can't continue to operate without a trustee or pay out certain benefits if the member was as individual trustee. If you had a company trustee with multiple members you can simply remove the member as a director of the company, you can have the executor of the deceased member or a power of attorney immediately become the director and the company carries on. These are absolutely crucial factors when someone dies or loses mental capacity.
Thinking about setting up a self managed super fund?
Setting up a self managed super fund gives you the opportunity to actively manage your super on your terms. However it comes with a lot of responsibilities. Our Sydney accountants believe that it doesn't matter who takes a more active role in managing your fund, each trustee or director is equally responsible.
Before we answer your question, let's take one step back.
When setting up a self managed super fund, you have to decide whether you have a corporate (company) trustee or an individual trustee. With a SMSF, you can have up to four members. So, if you have a family fund with four members, all four members must each become trustees of your super fund. If you have two members, both members must be trustees of your super fund.
The other alternative is that you can opt to have a company act as the trustee of your self managed super fund. If you decide to have a company trustee, all the members of your SMSF must be directors and all directors must be members. So if you had two members, then only those two members can be directors of your trustee company.
While there are advantages to being an individual or company trustee, our Sydney accountants believe that there are 7 reasons why having a corporate trustee is by far the better way to go.
1. The most important point is for asset protection
If individual members were the trustees of your self managed super fund, the legal ownership of the assets are the members. This can create some problems. How? Well let's say that you buy a residential or commercial property inside your super fund and one of your tenants falls over and injures themselves. The tenant can turn around and sue the legal owner of the property which would be the individuals as trustees. And as individuals your personal assets, being your family home and other assets are at risk of being taken away from you. However, if you had a company acting as the trustee, the legal ownership is that of the company not the individual members. The tenant can't sue you as a director of a trustee company.
2. Individual trustees can only pay out retirement pensions
If you have individual trustees, you can only pay out retirement pensions. If you're intending to point pay out lump sum benefits, death benefits, disability benefits or transition to retirement pensions, which are stand out features of a self managed super fund, you're limited as to how you can pay these benefits out to members and beneficiaries of all members which can be very costly. You must have a corporate trustee to be able to pay out these benefits.
3. Increase individual land tax liabilities
With self managed super funds now able to borrow money to buy residential and commercial properties, property investing inside super has seen a dramatic increase. If you have individual trustees who are then the legal owners of the property, this will increase the amounts counted towards their personal land tax threshold, where as if the trustee was a company, the land tax is applied to the super fund.
4. Lower loan to value ratio's
Whilst we're on the topic of borrowing money to buy property in a self managed super fund, banks will lend more money to super funds with company trustees than they would to super funds with individual trustees, which means that your fund can leverage higher priced properties or require less money to invest in property.
5. Longevity
A self managed super fund is designed to allow it to run forever, unlike other trusts such as family trusts that have a life span of 80 years. In order for your fund to last and be passed down from one generation to another, you need a trustee that doesn't die. The only structure that can do this is a company, so if you want your SMSF to last forever and to get passed down tax effectively from generation to generation, you must have a company trustee.
6. Administrative ease
All assets purchased in a self managed super fund must be purchased in the name of the trustees. The problem here is that if you have a family super fund, members come in and out of the fund. For example members die, they get married, divorced, children can come in and out of funds depending on their life stage. Every time a member enters or leaves the fund, if you have individual trustees you have to continuously change the name of the bank account, asset registers and so on. It can be extremely frustrating, time consuming and a very costly exercise. Can you imagine if your fund had 50 direct shares, exchange traded funds and property? However, if you had a company trustee you don't have to change anything because the owner will always be the trustee company. All you have to do is add or remove directors, which is a lot less painful.
7. Estate planning
Lastly, if a member dies or becomes mentally incapacitated and the trustee is an individual, this can cause significant issues for the fund. The fund can be put in a situation where it can't continue to operate without a trustee or pay out certain benefits if the member was as individual trustee. If you had a company trustee with multiple members you can simply remove the member as a director of the company, you can have the executor of the deceased member or a power of attorney immediately become the director and the company carries on. These are absolutely crucial factors when someone dies or loses mental capacity.
Thinking about setting up a self managed super fund?
Setting up a self managed super fund gives you the opportunity to actively manage your super on your terms. However it comes with a lot of responsibilities. Our Sydney accountants believe that it doesn't matter who takes a more active role in managing your fund, each trustee or director is equally responsible.
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