Having advised about self-managed super funds for more than 30 years, my advice to clients on various SMSF issues has changed. One such issue is the setting up of an SMSF. I originally steered clients towards being individual trustees, whereas today I recommend that my clients set up a company to act as trustee.
The main reason why clients chose to be individual trustees was the initial saving of the cost of forming a company, and the annual saving of the company lodgement fees.
I now explain to clients that having a company act as trustee is like an insurance policy that reduces costs and administration when one of them dies. I also use this concept of insurance when speaking to individual trustees on the benefits of appointing a company to take over as trustee now, rather than dealing with the issues in the future.
Being presented with the alternatives of what must happen when one of them dies, such as winding up the fund, appointing another person to act as a trustee, or rolling into another super fund, in most cases they choose to set up a company to take over as trustee now.
Faced with the dilemma
Once clients had decided to form a corporate trustee SMSF I was faced with the dilemma of following what the Australian Taxation Office says must happen, or taking a more practical approach. According to the ATO all investments held by an SMSF must be in the trustees’ name/s, and when there is a change of trustee the name on all investments must be altered to show the new trustee.
After checking the relevant regulations in the Superannuation Industry (Supervision) Act 1993 (Cwlth) I could find nothing that stipulated that ownership of all assets of a fund must be changed to reflect a new corporate trustee. The ATO when asked for the legal basis of their interpretation could only quote the requirement for a super fund to keep its assets separate from that of members, and the requirement for the trustees to prepare an investment strategy.
My reason for questioning the ATO’s view of the regulations was to save my clients the cost of unnecessary work and fees. Being a fee-for-service advisor, changing the trustee’s name on all investments would involve mountains of paperwork and many hundreds of dollars in cost to the fund, and in addition, if funds were on a New South Wales registry, stamp duty was also payable.
Cost unpalatable
The cost to clients of changing the ownership name for all investments was even more unpalatable when many had maturity terms of between two to seven years. This meant if nothing was done the investments would mature in the relatively near future and replacement investments could be put in the name of the new trustee then.
There are some investments and assets that should have the ownership name changed to the corporate trustee. These include bank accounts, real estate and shares.
For other investments, where the ownership clearly shows the name of the super fund, drawing up a nominee or custodial agreement can remove any doubt as to who owns the assets. The custodial agreement states that the original individual trustees hold the investments in a custodial capacity on behalf of the new corporate trustee.
Rather than making the decision for clients, each was given the choice between changing all investments to the name of the new corporate trustee, with an estimate of the cost of implementing this, or only changing the name on those investments that really needed to be changed. Not surprisingly, clients tended to go for the less costly and more practical option.
