Why your SMSF needs a corporate trustee

Background

One of the first questions for everyone that sets up a SMSF is: Should I have a corporate trustee? According to the statistics, most SMSF members say ‘no’. Most should be saying ‘yes’.

The basic requirements for SMSF trustees (as set out in the loan to valuation ratio (LVR) with a corporate trustee in place.

Remember, unless you have someone ready to step into the breach, every SMSF faces the prospect of eventually becoming a single member fund. A corporate trustee might at that point become a necessity.

If you’re setting up a new SMSF, the case for a corporate trustee is compelling. But if you’ve already set up your SMSF with individual trustees, it’s not quite so simple because of the work in switching.

Should we switch?

One personal financial adviser we asked tells all their clients to use, or make the switch to, a corporate trustee. But whether you should switch depends on your personal situation, including the assets you own and the state in which you live.

Changing the title documents for property, for instance, may require a lot of paperwork, including lodging forms with the Office of State Revenue (the department which collects stamp duty). Depending on the state you live in, you may also have some stamp duty to pay.

Even something like a term deposit can, depending on the institution, be a nightmare when it comes to changing the names on the account. But if your bank isn’t a pain and you have fairly simple investments, switching trustees may not be a big deal.

Here, an interesting conundrum emerges: Those with the most to gain from a corporate trustee are likely to have the hardest time switching. Remember, painful or not, this is a process that every SMSF without a corporate trustee is going to have to go through at some point. And some will end up doing it more than once.

Death (or incapacity) of a member, adding a member, or a member wishing to depart (for instance, as a result of divorce) will all trigger this process. Whilst the trigger point may be some way off, the downside is that the timing won’t be of your choosing. Indeed, it may end up being the worst possible time.

Of course, everyone’s circumstances are different and this is not a process you want to get wrong. You should seek personal legal or financial advice before taking the plunge.

What if I’m perfectly happy with individual trustees?

A corporate trustee is generally preferred, but this guidance is not absolute.

For instance, a financially astute couple, with (happy) family members ready to step in as trustees if necessary, may see no need to change. They might have no intention to allow new members, borrow to buy property and be easily able to deal with the necessary administration in the event of the death or incapacitation of one of them (some people intend that they would simply make the switch to a corporate trustee at that time).

Remember to be alert to changes in your circumstances. A future decision to, for example, buy (or sell) property might make that a suitable time to make the switch.

Action points

If you’re setting up a SMSF today, corporate trustees offer a number of benefits at very little (or no) cost. Members with SMSFs using individual trustees should consider switching, or keep an eye on when a switch may be appropriate.