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Most SMSFs have individual trustees. Why should I opt for a corporate trustee?

Even though anybody who is well advised, and who takes that advice, will have a company as trustee, more than 80 per cent of SMSFs have individual trustees – the members. Unless the fund is a one member fund, every trustee must be a member of the fund and every member of the fund must be a trustee.

Think about what would happen if a member becomes incapacitated. An incapacitated person cannot act as trustee, which means they would be forced to exit the fund if they did become incapacitated and had not given an Enduring Power of Attorney to somebody else who did have the capacity to act for them.

If the fund happened to be a single member fund with a corporate trustee, and the sole member and sole director of the company becomes incapacitated, the fund would have to be wound up unless an Enduring Power of Attorney had been given to someone else to act on the sole member’s behalf.

Many of the funds that have been formed recently have only chosen the do-it-yourself route because they wanted to borrow for residential real estate. Imagine what would happen if a fund member became incapacitated, and no power of attorney was in place, and the fund had to quickly find the money to pay out the member who had to leave the fund.


Another issue is that trustees are personally liable for the liabilities of the fund. That’s not a big issue I hear you say, a superannuation fund is only a vehicle that holds assets – how could it possibly have a liability?

Well, consider a recent action by the Tax Office against a couple I’ll call Mr and Mrs X. They were Egyptians living in Australia, and were the trustees of their own fund.

After a family dispute Mr X withdrew all the money in the fund and departed with it to take up permanent residence in Egypt. Mrs X found herself trustee of a fund that no longer had any assets. Because Mr X had not satisfied a condition of release, the Tax Office took the view that there had been wrongful withdrawal from the fund and took away its concessional tax status.

The result was a tax bill to the fund of more than $900,000.

Mrs X was outraged and fought the Tax Office in court. When the litigation ended, and the court found in favour of the tax office, Mrs X found herself owing over $2 million when the penalties and court costs were taken into account. If the trustee had been a shelf company her liability may have been minimal.

Extreme – maybe. Well then, think about Mum and Dad who have their own fund with themselves as trustees. One day, by mistake, Dad banks an interest check for one of the fund’s investments into his own account. The powers that be will regard this as a serious breach of the regulations and the fund could lose its tax-free status. To make matters worse, the bulk of the fund’s assets are invested in one of those shonky mortgage trusts and they will be lucky if they get back 20 cents in the dollar. Under these circumstances, the fund could easily have a negative net worth, which could create a personal liability for the trustees.

The message is clear – if you have an SMSF get yourself a corporate trustee, and also make sure enduring powers of attorney are in place for all members. The cost is small compared to the potential liability.

Noel Whittaker, personal finance author

Most SMSFs have individual trustees. Why should I opt for a corporate trustee?
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