Corporate Trustees A Must For A Self Managed Super Fund - Part 1

1. Constitutional requirement;
   
   
2. Assets must be in the trustee’s name;
   
   
3. Pensions are non-rebatable if paid to an individual trustee; and
   
   
4. Trustee litigation exposure.

1. Constitutional requirement
   
   The Superannuation Industry (Supervision) Act 1993 (SIS Act) requires the trustees of a superannuation fund, including SMSFs, to make a choice as to whether the broad rules found under the Act will apply to their fund and as a result, regulate the fund. For a SMSF, the regulator is the Australian Taxation Office (ATO) and in accordance with Section 19 of the SIS Act only two types of funds can become regulated:
   
   
   1. Funds with a corporate trustee; or
      
      
   2. Funds with individual trustees, with a primary purpose of paying old age pensions.
   
   These laws may not seem important in isolation but become vital when put into practice. For example, once a fund member retires they may not want to start a pension, but rather be paid a lump sum. 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–its primary purpose should be the payment of pensions, not lump sums.
   
   Alternatively, in a SMSF with a corporate trustee, a lump sum or pension can be paid to members on retirement.
   
   
2. Assets must be in the trustee’s name
   
   Regulations governing the assets of SMSFs specify assets must be held in the name of the trustee. Confusion can arise in separating assets held by an individual trustee’s own accounts from those held as trustee of the SMSF.
   
   A SMSF can see multi-generations find their way in 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 to commence their own SMSF or alternative superannuation options.
   
   Similarly when a member of a fund dies, an executor may be appointed (subject to the fund’s trust deed) as a trustee for the period from the death of the member until death benefits commence to be paid to the deceased member’s dependents or legal personal representative.
   
   In short, trustees come and go and this raises a painful administration problem for individual trustees in a SMSF.
   
   When a new member joins a fund with a corporate trustee, only the underlying directorship will change - there is no need to change the title of all investments held by the fund.
   
   
3. Pensions are non-rebateable if paid to an individual trustee
   
   Section 19 of the SIS Act states that where an individual trustee resides in the fund, the sole or primary purpose of the fund is to pay a pension.
   
   However, the pension rebate provisions in 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”. This means that where the fund provides a pension to a member who is also a trustee of the fund, the pension may not be rebatable.
   
   
4. Trustee litigation exposure
   
   Where the trustee of a fund is subject to litigation such as personal liability action in relation to one of the fund’s properties, the trustees will be jointly and severally liable.
   
   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.
   
   Where there is a corporate trustee, any action is limited to the assets of the company and not the underlying directors.

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