While setting up an Self Managed Super Fund, one of the first major dilemmas which members face is whether to have individual trustees or a corporate one. There are different costs and fees involved depending on the decision made. Individual trustees are free, while setting up a corporate trustee for a self managed super fund (SMSF) may cost a bit initially (ASIC charges $469 to register a special purpose company to act as trustee for an SMSF), but the benefits far outweigh in the long run.

The benefits include

• Better separation of assets.
• Less cost/efforts while changing ownership of assets.
• For any violation of SMSF rules, penalty will be levied on single corporate trustee, which directors can share between them.
• Liability of corporate trustee.
• Perpetual ownership of assets, even in case of death of director of Trustee Company.

Please note that for a special purpose company to act as trustee of a SMSF, a constitution of the company with some special provisions and rules are required and a set of replaceable rules provided by corporation law are inadequate . Many of the above benefits also apply when setting up a family discretionary trust & a unit trust. In this article we discuss the various issues which an advisor needs to consider before advising clients. 

Click here to learn how to set up a special purpose company in less than 10 minutes 

Corporate Trustee – New non Trading Company Vs an existing trading entity

Once you have decided that a corporate trustee is suitable for your client situation, another decision has to be made regarding the corporate entity. The decision involves whether we can use an existing trading company or should a new non trading entity be set up to act only as corporate trustee of the trust.

To save additional set up costs (e.g.... ASIC costs), sometimes trustee may opt for an existing trading company to act as trustee for their newly formed trust. Although there is nothing in the legislation which prohibits an existing company to act as trustee of the trust, but there are many complex issues which must be considered.

These complex issues are:- 

1) Existing trading corporate entity is not eligible for reduced Annual Fee in case of SMSF trust

2) Accounting and record keeping issues

3) Segregation of assets

4) Business between two entities

5) Legal liability

6) Borrowing from a bank under Section 67A & 67B of SIS Act

Click here to learn how your SMSF can borrow from a bank  

1) A Trading corporate trustee is not eligible for reduced ASIC annual fee

Definition of special purpose company is under paragraphs (f) of Regulation 3 of the Corporations (Review Fees) Regulations 2003 and it states that ; 

• the constitution of the company prohibits distribution of the company's income or property to its members; and
• the sole purpose of the company is to act as the trustee of a regulated superannuation fund within the meaning of section 19 of the Superannuation Industry (Supervision) Act 1993

Using an existing or a trading company as trustee will devoid the company of the benefit of reduced ASIC review fee of $47 ( wef 01/07/2016).

Please note that a trustee Company of a bare trust  aka property custodian trust (a custodian trust is used to hold property when the SMSF borrows) and a family discretionary trust do not qualify for reduced ASIC annual fee as these trusts are not covered under the above regulation.

2) Accounting & record keeping issues 

The Corporations Act in s286(1) states that a company must keep written financial records that:

• correctly record and explain its transactions and financial position and performance, and
• Would enable true and fair financial statements to be prepared and audited.

The obligation to keep financial records of transactions extends to transactions undertaken as trustee.

In case of a company that is a trading entity and a trustee company, both these activities should be recorded and accounted separately in two separate sets of accounts. This separation will inevitably increase cost associated with special care required for separate record keeping and may have a higher probability of costly errors.

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3) Assets Segregation issues

Any asset held by a company in its own capacity of a "trading entity" and as "trustee of a trust" should be identified separately and recorded separately. Assets may include various investments such as shares, units, bank accounts, and property.

When a company holds property on behalf of a trust, the land titles office of most states records the name of the company as the "owner of the property" and does not recognize a trust. When this happens, the trustee company must execute a declaration of trust or an acknowledgement of trust to ensure that the underlying trust remains beneficial owner of the property. If this declaration of trust is not in place, it is possible that the office of state revenue may treat the sale of property as sale by the company and not by the company on behalf for the underlying trust.

This misunderstanding can result in unnecessary capital gain tax as that trust can also be a self managed super fund with all members in pension phase with zero tax liability, whereas the company be liable for full 30% tax without any discount. To sort this matter out, in an absence of a stamped declaration of trust, office of state revenue may require several evidences and proofs as to true ownership of asset.

Click here to learn more about declaration of trust and acknowledgement of trust

When an investment is held by the company on its own behalf and as trustee for a trust, this can cause some practical issues. For example a trading entity owns shares in BHP and the same company which is a trustee of a SMSF also owns shares in BHP. Please note that assets should be clearly identified in terms of ownership, this may prove a bit difficult to record when dividends are received, since the assets in both the scenarios are held by one and the same company for practical purposes. This risk can be mitigated by putting enough controls in place such as separate bank accounts for both activities. However, care should be taken so that payments are made and funds are deposited to the correct account.

Any error, even an inadvertent one, may prove to be a costly one, e.g... If funds are deposited in the wrong account, for example, if trading entity's dividend are deposited in an SMSF bank account, the amount can be treated as a contribution and if SMSF's dividend is deposited in the company's bank account, this may amount to early access as SMSF assets are preserved till the member's retirement age. However, an honest mistake can be corrected within a reasonable time, but there is always a danger of making several mistakes during the year and warrant unnecessary comments from the fund auditor.

The situation may become more complex in case the trading entity is in financial trouble. A liquidator may be appointed, effectively putting the company under potential administration. In such a case, the company may have to prove separate ownership of its assets and proof and evidence may be required for each asset which is held under a trust and not owned by the company. This collection of evidence may involve further time, cost and efforts as some of these assets may have been purchased many years back.

The requirements for Self Managed Super Funds are quite stringent and there should be no room for any possible overlapping of ownership. To avoid any such circumstances, it is advisable to have a new corporate entity which will act as a special purpose SMSF trustee company or a trustee of a discretionary trust or a unit trust.

4) Inter Business activity

It is possible to have business dealings between the two corporate entities, that is a related corporate trading entity and a corporate trustee of an SMSF, for example, a trading entity may pay contributions to the SMSF for members of the fund, lend money to the corporate trustee of the SMSF under sec 67A and 67B of SIS Act. Corporate trustee of an SMSF may loan money or make an investment in a related corporate party (e.g... less than 5% in house asset rule) or the trading entity may be a tenant of the SMSF property. 

This may create various peculiar situations such as, the trustee company as trustee of a SMSF may own shares in itself - an investment in a related party which may mean that the trading company may pay dividends to itself as trustee of the SMSF.

Since these trading transaction have to be recorded by the company in different capacities. In case one entity has cash flow issues, it can create further havoc, for example if the trading entity is the tenant of the property which is owned by the SMSF trustee company (itself) and is having some cash flow issues - this will mean that the same entity will be suing itself for outstanding rent and if it decides not to seek rent from the tenant, it may breach section 109 of SIS Act - arm's length rules.

To lend money from your SMSF to a related party, you must ensure that the loan is on commercial terms and do not breach the in-house asset rule as per Section 71 and Section 82 of the SIS Act and the agreement must be in writing. To learn more on how to lend money from your SMSF to a related party, click here.

There could also be land tax issues, as the trading entity may own some assets below the land tax threshold and also own an asset on behalf of a trust, since the land titles office has one name, it may make the company assessable as the total land value could be above the land tax threshold amount. This assessment may however, be overturned, once proof is provided to the office of state revenue of the correct beneficial owner of the two assets. This is yet another example of avoidable time consuming unnecessary administrative task. To keep matters simple, it is best to have a new non-trading entity as trustee of a trust.

5) Legal Liability issues

If any provisions of SIS act are violated, corporate trustee of the SMSF may receive penalty from ATO as being the trustee of the SMSF. If it is a serious offense, the ATO may take some serious action against the trustee of the fund, this can jeopardize the trading entity's future.

If your SMSF has an existing trading corporate entity as trustee of the SMSF, it is very simple to unfold this complexity by forming a new corporate entity for $555 including $469 ASIC fees and then change the corporate trustee from one corporate entity to another by a deed of variation for $220. To learn more how to change corporate trustee of a SMSF with another corporate trustee, click here.

6) Borrowing from bank

Some bank lenders may insist that trustee of the SMSF and the trustee of bare trust (property custodian trust) should be two separate non trading corporate entities. In this case members of the fund do not have a choice, but set up a corporate trustee and change from individual trustees to a corporate trustee. Click here to learn more on how to change from individual trustee to a corporate trustee for an SMSF.  

Dividend Data for 2016 uploaded on www.onlinesmsfaudit.com.au

We have uploaded 30th June 2016 closing prices and dividend data on the online audit software. When you commence an audit for 2016 year which was audited by you in 2015, the system will automatically roll over and provide you with 30th June 2016 ASX listed closing market prices and ASX dividend and distribution figures.

We have now implemented a new form, where you can enter date of purchase of each ASX security and in each year the system will automatically calculate change in market value and if the asset is sold, it will also provide you CGT calculations automatically, discounted or otherwise.

Imagine if a fund has 30 ASX shares, checking closing prices and dividend data is a time consuming exercise, for example checking claim for correct imputation credits will take at least an hour, if 100% testing is done, the system will do this work automatically for you and if you enter trial balance figures, it will even prepare a discrepancy report for your working papers.  

Click here to learn how to audit an SMSF in half the time