Corporate v Individual Trustees – Is a Corporate Trustee good insurance?
One of the questions advisers are frequently asked is “Should I have a Corporate Trustee for my DIY Fund?” or “Why do you want me to go to the expense of setting up a Corporate Trustee for the super fund – wouldn’t it be easier and cheaper for us to be individual trustees?
Based on ATO data, more than 70% of Self-Managed Super Funds have individual trustees. It appears that lower initial set up costs (and slightly cheaper ongoing costs) outweigh the advantages of a corporate trustee for most clients. We won’t detail the stated advantages of having a corporate trustee here (there are plenty of websites which will compare the two alternatives) but the following case may give clients something to think about in making this decision.
The case involved a husband and wife SMSF with approximately $3.5m in net assets. The husband left the wife, and disappeared overseas along with all the SMSF assets. As a result of this breach of the sole purpose test, the ATO issued a penalty of nearly $3m (for the breach and non-compliance). As the trustees were individuals, the ATO pursued the remaining trustee (the wife). The key point is that individual trustees have an unlimited joint and several liability. That is, the ATO can take action personally against any individual trustee (for non-super assets) up to the value of the breach with the individual then having to take action against fellow trustees for their share of the claim.
Whilst legal opinion is that having a corporate trustee in this case may not have altered the outcome (as the wife was judged not to have acted prudently), legal advisors can point to cases where DIY Corporate Trustees have been saved from unlimited personal liability due to the existence of a corporate trustee.
You can view the decision to adopt a corporate trustee structure as a form of prudent insurance. Adopting this approach the question to the client then becomes, “Do you insure your home? If so, why wouldn’t you adopt the same approach and insure your SMSF by having a corporate trustee.”
