When establishing an SMSF the members have a critical decision to make.
Do they set it up as individual trustees or as a company appointed as a corporate trustee, with the members being directors of the company? We explore what to remember when making this decision.
The initial set up costs: Corporate vs. Individual
Based on recent ATO statistics, 95% of new SMSFs registered in the 2015 financial year were registered with individual trustees. Establishing a fund with individual trustees is definitely cheaper initially, with costs to incorporate a new company. However, the initial savings can result in significant future costs down the line.
Recently, RSM assisted a client in changing a trusteeship of an SMSF from individuals to a corporate trustee. The costs were approximately $1,500 including company incorporation fees, legal fees for change of trustee, and fees related to changing the trustee name on investments. There was also a significant amount of administration time required by the trustee to transition through these changes.
Four advantages of going “corporate”
Corporate trustees have several advantages over individual trustees including;
- Avoiding disruption: A continuous operation when changes to membership occur, such as a death, divorce, or admission of a new member;
- Minimising ATO fines: If an ATO fine is imposed on a corporate trustee only one fine needs to be paid. In comparison all individual trustees are fined;
- Greater lending power: Lenders are more inclined to lend to corporate trustees under a limited recourse borrowing arrangement;
- Clear asset ownership: A sole purpose corporate trustee provides a clear ownership structure of assets as being only for the SMSF. They won’t potentially be considered a personal asset as with Individual trustees.
Think in the long term
If you’re establishing an SMSF, keep in mind the cost factors and advantages outlined above. Think in the long term. Consideration should be given to appointing a corporate trustee and the future implications of the core foundations of your fund