SMSFs: Why corporate trustees might be the wiser choice

A recent case alerts us to the advantages of appointing companies as trustees of self-managed super funds (SMSF). The case highlights that individual trustees are exposed to personal liability for non-compliance with the relevant super laws.

The Victorian Civil and Administrative Tribunal (VCAT) recently upheld a decision of the Commissioner of Taxation to impose tax liability (at 47%) plus penalties on the individual trustee of a SMSF despite the fact that:

  • the actions resulting in non-compliance were those of her co-trustee (her husband); and
  • those actions were taken without her knowledge.

The case is Shail Superannuation Fund v Commissioner of Taxation.[1]

 

Overview

The case of Shail reminds us:

  1. that the liability of a SMSF's personal trustees is joint and several; and
  2. trustees should participate fully in the decision making processes of their SMSF. Trustees will still be liable despite not being aware of, and not responsible for, the conduct causing the non-compliance.

VCAT was aware of the significant liability imposed on the trustee wife and was sympathetic to her plight. It felt, however, that affirming the Commissioner's decision was necessary to uphold the policies of the legislation.

You can read the full case here. We will discuss it below.

Corporate trustee vs individual trustee

There are significant benefits to appointing a corporate trustee (company) for your SMSF vs individual trustees. These include:

  1. Liability
    • If a corporate trustee incurs any liability, the individual directors of the company will not suffer personal liability (other than in exceptional circumstances).
    • An individual who acts as trustee exposes their personal assets to claims and court orders should they incur any liability as trustee of an SMSF. If the individual's right of indemnity against the SMSF is not sufficient to discharge the liability, then the individual will be personally liable for the shortfall.
  2. Simpler succession
    • If a SMSF has a corporate trustee, the control of the SMSF can continue even after the death of an individual SMSF member / director.
    • Where a SMSF has one or two individual trustees, an additional trustee must be found and appointed to the fund on the death of a member / trustee. Failure to take this action may result in the SMSF becoming non-compliant.
  3. Separate Assets
    • It is easier for a corporate trustee to ensure that trust assets are kept separate from the personal assets of SMSF members – a key trust and super law obligation.
  4. Administrative efficiency
    • If a new member is introduced to a SMSF, then generally they must become a trustee of the fund.
      • If the SMSF has an individual trustee, then a deed of appointment needs to executed for the new trustee and, usually all trust assets need to be transferred into the new trustee's name (or jointly with other trustees). This can cause major administrative hassles if the trust assets consist of real estate and shares.
      • If the SMSF has a corporate trustee, then a new director needs to be appointed to the company and notified to ASIC. The hassles of transferring trust assets do not apply to a corporate trustee because the SMSF assets are usually held in the company name, with the company remaining as trustee.
  5. Lender requirements for limited recourse borrowing
    • Bank lenders generally insist upon (or at least prefer) the SMSF having a corporate trustee.

Perhaps the most notable of these benefits is that corporate trustees have limited liability. The situation in Shail would not have been so dire for the wife if a company had been the trustee of the SMSF.

More about the Shail case

The marriage between Mr and Mrs Shail was troubled and in 1992, they sought legal advice regarding a divorce. The couple reconciled and their relationship continued for some years. In 2005, withdrawals were made from the Shail Superannuation Fund (Fund) totalling $3,460,000 and were sent to a bank account in Turkey. By this time, Mr Shail had disappeared overseas.

The issue

  • At the time of the withdrawals, neither trustee had reached their preservation age of 55 years.
  • The Fund was declared non-complying by the Commissioner.
  • The Commissioner assessed the taxable income of the Fund to be $3,369,944, with tax payable of $1,583,873 (the non-complying Fund lost its concessional tax treatment and was therefore taxed at 47%).
  • The Commissioner also issued a notice of penalty assessment for $1,475,322.
  • The total tax liability for the Fund was therefore $3,059,196.10.At VCAT, Mrs Shail argued that given she had no knowledge of the actions of her husband, she was not liable to pay tax on the stolen income.

The decision

VCAT found in favour of the Commissioner. While sympathetic to Mrs Shail's situation, the Tribunal decided that:

  1. the requirements as set out in section 42A(5) of the Superannuation Industry (Supervision) Act 1993 (Act) had not been met. The trustee had contravened regulatory provisions of the Act, so the Fund was deemed non-complying;
  2. Mr Shail had contravened sections 62 and 65 of the Act which require a trustee to maintain the Fund solely for its core purpose and to ensure that no money is lent from the Fund to a member or relative;
  3. the purpose of the Act is to ensure each member is fully involved and has the opportunity to participate equally in the decision making processes of the fund (ie: so that the fund is truly self-managed);
  4. there could be cases where discretion may be afforded to SMSFs under section 42A5(b)(ii) of the Act so as to grant relief to the trustee, but this was not such a case given the seriousness of the contraventions; and
  5. a finding of compliance would undermine the objects of the legislation and the policies that underpin it.

On the basis of the above, the Tribunal found the Fund non-complying and that the tax assessment and penalties issued by the Commissioner should stand.

More information from Maddocks

For more information, contact Maddocks on (03) 9288 0555 and ask to speak to a member of the General Commercial or Superannuation teams.

More information from Cleardocs

For more information about the Cleardocs:


[1] [2011] AATA 940.