A key development possibly missed by many investors this year due to its timing in early January was an announcement from the Australian Taxation Office: it turns out the tax office has reset its numbers on SMSFs and corporate trustees now dominate the sector.
This is a surprise, because we have always been under the impression the SMSF sector was dominated by individual trustees.
Even last year the ATO was saying that more than 70 per cent of SMSFs were run under individual trustee structures.
But all that has changed after the ATO did a “revised data set”; the new numbers suggest 57.8 per cent of SMSFs use a corporate trustee structure and 43.2 per cent use individual trustees.
What’s more, when we look at 2017 registrations of new SMSFs, it is estimated a thumping 80.8 per cent decided to go with a corporate trustee set-up over individual trustees.
So why the recent trend towards corporate over individual?
There are several decisions a new SMSF trustee needs to make. They include choosing the name of the fund, setting the investment strategy and deciding what to invest in. Another decision, which without proper education or advice is often made wrongly, is determining whether to use an individual or corporate trustee.
Luke Star, certified practising accountant at Star & Associates, says “prospective SMSF trustees are becoming more educated these days and taking note of the long-term benefits of a corporate trustee set-up”.
An individual trustee SMSF is easier to set up as only one structure is needed, rather than two structures with a corporate trustee. The assets of the fund are registered in the name of the individual trustees and trustees are not required to understand and comply with corporation law requirements.
But certain events down the track can cause an individual trustee SMSF to become unstuck.
If a new member is to be added to the fund — such as a new partner or child — as the assets of the fund are registered in the name of the individual trustees, adding or removing an individual trustee requires all investments to be re-registered under the names of new trustees. In addition to administrative time and costs, there can be other costs associated such as legal costs to vary deeds, particularly if the SMSF holds direct property assets.
From a practical standpoint, amending the title of investments can be incredibly difficult as the administrative burden of changing investments and amending deeds is impractical.
Star says: “Another issue is that there cannot be one individual trustee so if husband and wife are individual trustees and one passes away, another individual trustee must be appointed otherwise the SMSF would need to be either converted to a corporate trustee SMSF (which can operate with a single director trustee) or the SMSF would need to be dissolved.”
Ken Peng, director of Sydney mortgage broking firm Vestyn Financial Solutions, says “for those looking to purchase property in super and require some level of borrowing, banks generally shy away from lending to individual-trustee SMSF. In fact, most lenders have a requirement that the SMSF has a corporate trustee if they want finance”.
So with all these issues facing individual-trustee SMSFs, it’s surprising that almost half of all SMSFs still use this structure. Star says: “My general observation is that people are seeking financial and accounting advice more today than in the past before setting up a SMSF. Previously, a lot of people requested whatever set-up was the cheapest and simplest and ignored advice around the benefits of spending extra for the corporate trustee set-up.”
A corporate trustee SMSF requires a company to be set up and each member of the super fund is a director of the company. The assets of the fund are registered in the name of this company, known as the corporate trustee of the SMSF.
In the past, the additional cost of setting up the corporate trustee would be a deterrent and many would opt for the cheaper individual trustee. However, today there are many web-based accounting firms offering SMSF set-ups at a fraction of the historical set-up costs, and traditional accounting firms have also been forced to reduce SMSF set-up fees to remain competitive.
Financial planner Xavier Lo says “a corporate-trustee SMSF today will typically cost anywhere between $1000-$2500 whereas it was common to pay up to double these amounts five years ago. Setting up a corporate trustee is a one-off charge and the discounted annual ASIC fee is barely worth a mention.”
Star adds, however: “There are circumstances where an individual trustee set-up may suit over a corporate trustee so there’s no one-size-fits-all solution. Accounting and financial advice is highly recommended to get the right structure in place from the beginning.”
If you are looking for a low-cost and simple solution for super, use a good industry or retail fund. For all the benefits and flexibility of a SMSF, careful consideration should be given as to whether an individual or corporate trustee structure should be used. But with the compelling benefits of corporate trustee and limitations of individual trustee, it is easy to see why the tide has turned and four out of five new super funds use the corporate trustee set-up.
3 Febuary 2018