Corporate Trustees A Must For A Self Managed Super Fund - Part 2

Monday 19 December, 2005

by Sharon Houghton

Corporate Trustees A Must For A Self Managed Super Fund - Part 1 explored the benefits of a corporate trustee from a legislative point of view while this article examines the practical aspects of choosing this type of trustee.

Is cost a real issue?

The establishment and ongoing costs associated with a corporate trustee are often cited as a disadvantage. However, there are some important points to consider:

• With the possibility of a SMSF lasting more than 100 years a corporate trustee will last into perpetuity, unlike an individual trustee;
  
• The on-going cost for a corporate trustee is between $45 - $212 per annum with minimal accounting costs; and
  
• The once off establishment fee is approximately $1,200 including ASIC registration fees.

Not all Corporate Trustees are the same

If you decide to use a corporate trustee, the next step is to choose the type of corporate trustee: an ordinary shelf company or a special purpose SMSF trustee company.
The rules governing a trustee company are found in section 17A of the Superannuation Industry (Supervision) Act 1993 (SIS Act). This section stipulates a SMSF is 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 the company 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, care needs to be taken in relation to the rules of the trustee company contained in the constitution for the following reasons:

1. Voting power on the Board
   
   The trustee is empowered to make a number of decisions including, but not limited to:
   
   
   • Appointing professional advisers eg: auditor;
     
   • Setting an investment objective and strategy;
     
   • Admitting members;
     
   • Acquiring and disposing of investments pursuant to the investment strategy;
     
   • Approval and payment of benefits to a member (including a payment of a pension);
     
   • Approval and payment of a death benefit to a dependant or legal personal representative of a deceased member;
     
   • Accepting a binding death benefit nomination from a member;
     
   • Reviewing audit reports; and
     
   • Creation of 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. This may not be appropriate, where there is a three member/director SMSF where the member with the most significant benefits can be out voted on important issues by two member/directors with minimal benefits.
   
   A common situation where this might be a problem is a fund where mum, dad and two children are members of the one fund. Previously if there was any concern about control over the fund we would have recommended the children be rolled into their own fund or into an industry fund. A practical solution we now recommend to our clients, upon establishing new funds, is to align a member’s superannuation fund account balance with voting rights.
   
   While it may also be possible to appoint one of these new corporate trustees or to adopt a new constitution for an existing corporate trustee, care should be taken. It is necessary for all members of the fund to agree to such a change because fundamentally the members’ rights are being changed. Another concern would be a two member SMSF with separated spouses as members. Apart from potential legal fights as to who remains a fund member, keeping the fund working during separation may prove difficult if both parties have equal voting rights.
   
2. Issues surrounding the death of a director
   
   As noted above, section 17A(3) of the SIS Act allows, subject to the rules governing the trustee company, an executor can be appointed as a director in place of the deceased member to oversee the distribution of the deceased member’s superannuation estate. If there is no allowance for the automatic appointment of the executor, the current members/directors hold control over the deceased member’s benefits. This may cause conflict for 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.
   
3. What happens in the event of incapacity?
   
   Like the issue of death, 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, takes 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–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 the directorship–therefore causing non-compliance issues for the fund.

There are several reasons why we believe a corporate trustee is beneficial for SMSFs. However, as each fund and its circumstances are different they must be looked at separately by a Specialist SMSF Adviser.

Source:ceoonline.com