Changing trustees of an SMSF

Everything an SMSF trustee should know about compliance.

There are number of reasons why the trustees of an SMSF are changed.

One of these is forced upon an SMSF when the trustees are individuals and one of them dies. Another reason can be when individual trustees want to be proactive, and rather than being faced with a lot of paperwork at a time in their life when they have lost their partner, preferred to form a company to take over as trustee of the SMSF.

This section of the SMSF survival centre takes trustees through the process of changing a trustee and the other administration work required.

In the section of the survival centre I will detail the following:

  • when a new trustee of an SMSF needs to be appointed,
  • the reasons why it is best to have a company acting as trustee for an SMSF,
  • the process of changing trustees of an SMSF,
  • what the ATO regards as best practice after a new trustee has been appointed, and
  • what legally trustees need to do after appointing a new trustee and how time and money can be saved by not following the ATO requirements blindly.

When does an SMSF need a new trustee

There are several times during the life of an SMSF when a new trustee needs to be appointed.

When a new member joins an SMSF that currently has individuals acting as trustees. In this case because all members need to be trustees the new member must be appointed to act as a trustee.

When two individuals are acting as trustees for an SMSF and one of them dies one of the following must occur:

  1. another person is appointed to act as the second individual trustee,
  2. a company is formed to take over as trustee with the remaining member as a director,
  3. convert the SMSF's investments to cash and roll the surviving member's benefits into an industry or public offer fund, or
  4. wind up the SMSF and pay out the benefits to the surviving member.

Where the remaining member of an SMSF wants to continue with the fund options one and two are the only really viable choices.

After the death of a member/trustee the remaining trustee has six months to take action. A new individual trustee can be appointed, or a company take over trustee,at any time while both original indivdual trustees are still both living.

The problem is the administrative steps to be taken and documentation needed when appointing a new trustee, either by choice or as a result of death, will differ depending on who is providing the advice.

The reasons why it is best to appoint a company as trustee

Choosing to have a company act as trustee adds another level of cost to the setup of the SMSF. As a result many people in the past chose to be individual trustees. Because of the problems that can occur when an individual trustee dies this can prove to be a false economy.

The extra cost of having a company act as trustee is initially about $800. There is also an annual lodgement fee of $42 a year as long as the company only acts as a trustee for the SMSF.

Having a company act as trustee can be an advantage for the following reasons:

  • When there is only one member. If a company is not used another person must be found to be a trustee. This means whenever super fund documentation needs to be signed the other non-active member must be available.
  • Having a company act as trustee makes it easier to differentiate between personally held investments and superannuation investments. In addition having a company with a short name makes it easier when filling out applications and other documentation when buying investments.
  • For a husband and wife fund when one of them dies very little work is required.

This means when individual trustees want to plan for the future when one of them dies it makes a lot more sense to appoint a company to take over as trustee rather than appointing one or two extra individuals as trustees.

When individuals act as trustees for an SMSF most of the documentation required to be signed, including the buying and selling of investments, requires all trustees to sign. Depending on where each of the individual trustees live this can prove to be a logistic and administrative headache.

The process of changing the trustee for an SMSF

When it comes to the documentation required for changing the trustees of an SMSF this is split into two categories:

  • Documentation required to remove the existing trustees and appoint the new trustee or trustees.
  • Documentation required to change the name that investments are held in. Some SMSF professionals and the ATO states that when there is a change of trustee all investments should be changed. In fact there is no legal requirement for all investments to be held in the currect trustees' name.

In addition to extra administration work for the trustee/members, or extra costs because an administration service is changing the name of the trustee on all investments, there can also be stamp duty costs depending on where investment registers are held.

Changing the name of the trustee on all investments does not make sense when there is an alternative, and when the SMSF holds investments that are expected to mature or be sold within the next five to six years.

Documentation to appoint a new trustee

The documentation required to resign individual trustees, and the appoint an extra individual or company to take over as trustee, should be set out in the SMSF's trust deed.

Some SMSF administration providers and lawyers state that when there is a change of trustee a deed must be drawn up to document the change. This can involve the members in a cost that in many cases is not warranted.

In many trust deeds I have seen there are clauses that state trustees of an SMSF can be removed and appointed when all or more than 75 per cent of the members agree to it in writing.

This means trustees in most cases, if the deed allows it, only need a resolution signed by all members to be drawn up. The resolution would detail the resignation of the individual trustees and the appointment of the company as trustee.

There may be documentation required such as the resignation of the original trustees and acceptance of the new trustee in writing. This can simply take the form of a letter written by the original trustees resigning and another by the directors of the company accepting the appointment of trustee.

Once a new trustee has been appointed, whether that is an additional individual or a company, there is extra administration work that can be required relating to the name that the SMSF's investments are held in.

Check list for changing the trustee of an SMSF

The process of changing the trustee of an SMSF can best be summarised as follows:

  1. Decide on whether an individual or a company will be appointed as a trustee.
  2. If a company is to be appointed one needs to be either formed, or if the members have a non-operating company this can be appointed to act as trustee. In this case an application can be made to ASIC so that the reduced annual fee will apply.
  3. Check the trust deed of the SMSF to work out what documentation must be drawn up.
  4. In most cases this should only require a letter from the individual trustees resigning, a letter from the directors of the company accepting the appointment as trustee, and a resolution signed by all members agreeing to the removal and appointment.
  5. Contact the financial institutions that the SMSF has its bank accounts with to work out what documentation they require.
  6. In most cases banks and other financial institutions will require anti-money laundering proof of identity forms to be completed plus providing copies of an ASIC search that shows the names of the directors of the company.
  7. Decide whether to change the name of the trustees on all investments or just those you want to. Check with the auditor of your SMSF to make sure they will be happy for not all of the investments being change the name of the new trustee. If the auditor says that you must change the name for all investments possibly look for a new auditor or accountant.
  8. If not changing the name of the trustee on all investments pass a resolution signed by all members that states that they will continue to hold the investments, with the list appearing below, in the capacity as custodians for the members and the trustee.

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