The report – A statistical summary of self-managed superannuation funds (SMSFs) – released as part of the Cooper Review in April 2010, disclosed that over 70 per cent of SMSFs have individual trustees. Further, the report revealed that in recent years nearly 90 per cent of SMSFs have been established without a corporate trustee. These statistics start ringing alarm bells, considering the great advantages that flow from having a corporate trustee.
The high rate of SMSFs with individual trustees is probably due to the perception that individual trustees are cheaper than corporate trustees. However, we believe that individual trustees can prove more expensive in the longer term.
Liability advantage
Many SMSF trustees overlook the potential liabilities that may arise in relation to their role. We all realise that accidents can happen which may expose individual trustees to substantial damages, even when they invest in what appears to be safe ‘bricks and mortar’.
DBA is aware, for instance, of an SMSF with individual trustees that invested in a property development that suffered a number of problems, and has the potential to not only wipe out their entire super savings but also result in claims against the trustee’s personal assets.
Another recent example of an unexpected personal liability arose in Dick’s case (Giovenco v Dick [2010] NSWDC 4). In this case, Dick owned a property in Darlington, NSW. He engaged Stephens, a plumber, to decommission a solar hot water system on the roof and replace it with a new gas system. In carrying out this work, the plumber did not arrange for the disconnection of the electricity to the old system. Three years later, a handyman was fatally electrocuted while working on the old system on the roof.
The court awarded $350,000 in damages to the de facto partner of the deceased. Of this amount, Dick was ordered to pay 20 per cent and the plumber to pay 80 per cent, or $280,000. The plumber was held 80 per cent liable primarily because he failed to notify Dick that he should have arranged for a licensed electrician to disconnect the electricity when the plumber decommissioned the old system.
The above case highlights that personal liability can easily affect individual trustees, and also highlights the attraction of corporate trustees.
A corporate trustee will provide individuals associated with the fund with the peace of mind that relates to limited liability. Namely, liability will be limited to the company and the director’s personal assets will not be exposed. However, a director that incurs a debt in the name of the company without having a reasonable basis for its repayment can be subject to personal liability.
Administrative efficiency
A corporate trustee also gives single member funds the flexibility to be controlled by one individual who can be the same sole director/shareholder. In comparison, a single member fund with individual trustees still requires two individual trustees.
Corporate trustees also provide an SMSF with other administrative savings. For example, if mum and dad were individual trustees and wanted to add (or subtract) a child as a member of their fund, they would generally require a deed of change of trustee and transfer all fund assets into the joint names of the three individual trustees. If they, instead, had a corporate trustee of their SMSF, they would only be required to add (or subtract) their child as a director. Naturally, this is a much simpler and efficient process.
Estate Planning
Another benefit of corporate trustees relates to estate planning. Smoother succession planning can be put in place so that a successor director can more readily step in for a director who dies or loses capacity, eg, who suffers a coma after an accident. Otherwise, the interests of that person may be entirely in the hands of the other director (who may be the second spouse).
In comparison, costly paperwork is required to change individual trustees upon the death or loss of capacity of an individual trustee. This is on top of the considerable paperwork that is usually associated with administering a person’s estate and obtaining probate of their will, etc.
Conclusion
Corporate trustees are recommended as a better and more efficient method than individual trustees. Moreover, a sole purpose corporate trustee is preferred, as this overcomes the risks that may relate to the company’s other activities and obtains the lower annual Australian Securities and Investment Commission fee of $42 (compared to $226 pa for an ordinary company).
Daniel Butler and Nathan Papson are lawyers at DBA Lawyers.
