SMSF: corporate or human trustee?

This article is reprinted with permission of the article author LawCentral. The views expressed are entirely their own and within their expertise. Read the article or watch the video here.

Question: My accountant suggested a corporate trustee for my Self Managed Super Fund. I already have a few companies – I know they are more expensive to operate than having individual trustees. Is he only trying to generate more fees from me? I’m not made of money you know.

Answer [by LawCentral]

It is a vexed question whether SMSFs should have corporate trustees. Everyone in the Superannuation game has a different opinion. I change my opinion daily.

But no two SMSFs are the same. So a blanket ‘yes’ or ‘no’ won’t cut it. Your adviser and accountant looks at the following things to formulate their opinion:

  • What is the relationship between the members? Will they change often?
  • What are the type and value of the SMSF assets?
  • Where are the SMSF assets located? Other states or countries?
  • How pedantic are you?
  • Do you need extra asset protection? Is there risk that the SMSF can go insolvent?
  • Are the members happy to pay higher maintenance costs for a company?
  • Contemplating Limited Recourse Borrowing Arrangements (formerly known as instalment warrants)?
  • Do you own more than one property in one state paying land tax?

Corporate Trustees add expense and complication. Your Accountant is best to do the cost/benefit analysis. If your accountant suggests a corporate trustee, they have already answered all of these questions.

Who can be trustee of a SMSF?

  • Humans as Trustees

If you want a human Trustee, all members of the SMSF must also be Trustees. You can’t pick and choose between members – it’s all or nothing. (There are minor exemptions for children and members living overseas.)

  • A company as Trustee (Corporate Trustee)

If you have a Corporate Trustee, all members must be the Directors of the Company. All Directors must be members of the Fund. The Corporate Trustee carries out its role as a Trustee of your superannuation fund just the same as you as individuals do.

If you are the only member of your SMSF, special rules apply. (See the Platinum member only section below.)

When should I have humans as trustees?

  • You want less hassle and the lowest administrative cost

It costs nothing (apart from food and shelter) to keep humans as trustees. There are no annual reports to ASIC or dates to lodge with ASIC.

  • You are unlikely to change the SMSF membership

It can become a nightmare to change the members of your SMSF with human trustees. Firstly, you need to admit (or exit) that person as a member (you have to do this anyway). Then, title to the SMSF assets is transferred to or from the member. This is because SMSF assets are held in the name of the trustees, not in the SMSF itself. For example, the four of you as members hold the SMSF land in your names. That is the law. You die; the property must now be transferred into different names. If you had a company, no transfer is required.

When should I have a corporate trustee?

  • You change the members of your SMSF often

If your members change often, you simply remove (or appoint) them as members and as directors of the corporate trustee. Although the directors change, the actual corporate trustee does not. As the SMSF assets are owned in the name of the corporate trustee, there is no need to jig about with the land titles office.

  • You are secretive and own lots of assets

Don’t want anyone to know what assets you own? A Corporate Trustee holds the assets in the name of the company. If someone does a land titles search using your personal name, they won’t find the real estate held in your SMSF.

  • You want to borrow in your SMSF

If you want to take advantage of Limited Recourse Borrowing Arrangements to borrow to fund SMSF assets, beware. Many lenders only agree to lend you money if you have a corporate trustee.

  • You need to amp up your asset protection

Assets in your SMSF are meant to be conservative – they are there for your retirement – not for speculation. Risky or not, I have had clients that have ended up with negative assets in their SMSF. Insolvency often leads to the SMSF Trustees going down with the sinking ship. Better to lose just a company.

  • You pay land tax

In most states, you pay a higher marginal rate of land tax the more land you have. Therefore, if you and your spouse already have a rental property then owning more land (as Trustee of the SMSF) increases the rate of land tax you pay. At Brett Davies Lawyers, we can usually transfer the land out of your name into the name of your new company – for no transfer (stamp) duty and no Capital Gains Tax.

Ok fine. I think I need a corporate trustee. Can I use one of my other companies as trustee?

Yes you can. But just because you can do something, doesn’t mean you should. Using a company for multiple purposes is fraught with risk. People who are pedantic and never make mistakes should only do it. I am pedantic and never make mistakes; however, I still use one company solely for my SMSF.

Why do you need a separate company? SMSFs are delicate. SMSF auditors are even more so. There can’t be any overlap between SMSF funds and other company funds. Weekly, I get calls from accountants where their clients accidentally used the wrong cheque book (or clicked the wrong internet banking account). Sure it is an accident, but the SIS Acts say this is incredibly illegal. No one can guarantee that they never make mistakes. Best to bite the bullet and set up a separate corporate trustee.

What are the ASIC fees for my corporate trustee company?

It is cheaper to run a company that acts as the trustee of your SMSF. Why? Because ASIC allows you to register this company as a ‘Special Purpose Company’. Your special treatment means that the annual ASIC review fee is only $41 per year (rather than the usual company review fee of $218). (The initial ASIC registration fee is still $412.)

You can build a Special Purpose Superannuation Trustee Company at LawCentral (it takes 8 minutes).

How do I update my SMSF to include a Corporate Trustee?

To change the trustee of your Self Managed Superannuation Fund (SMSF) to a Corporate Trustee, you do two things (in this order):

  1. Set up a company. Use the LawCentral Build a Company document to do this. After you build the company, you register it at ASIC. ASIC charges $412.
  2. Update your SMSF Deed by using the SMSF – Deed Update document available at LawCentral. Select: change your trustee into a Corporate Trustee. Insert: new company name, ACN and address

(Original publication date 18th October 2010 in LawCentral Bulletin 338.)

Protect yourself from identity theft

Two months ago my sister, Julia was the victim of identity fraud. Two thousand dollars quickly disappeared from her bank accounts before she detected it.

This week is National Identity Fraud Awareness Week (NIDFAW), so I encourage you to consider how you may be placing yourself at risk of identity fraud. Then act to prevent it.

NIDFAW spokesperson Peter Campbell noted that “potentially, all it could take is a combination of a few carelessly discarded pieces of information such as name, date of birth and bank account details for the fraudsters to have the information they need to attempt to commit identity fraud.”

How my sister was defrauded

  • Offender contacted her bank and changed her phone banking password.
  • Offender ordered a Visa Debit card linked to her savings account.
  • Offender stole the Visa Debit card and PIN from her letter box.
  • Offender withdrew the max $1,000 from ATM using Visa debit card.
  • Offender used phone banking to make a cash advance from her credit card to her savings account.
  • The next day the offender withdrew another $1,000 using the Visa Debit card.
  • That same day my sister detected the fraud and contacted her bank about the missing $2,000. The card was cancelled.

It could easily happen to you

Often we are very conscious of online identity fraud but paper based fraud is still the most common way for an identity to be stolen.

And 75% of Australians put themselves at risk of paper based identity fraud by throwing away highly sensitive information.

Lock away your mail

Needless to say Julia now has a lock on her letter box, as do we. I recommend that you do too.

In fact, some years ago after mail was stolen from the letter box at our old house we decided to get a post office box. If there is a post office convenient to you then a post office box can be a low cost way to help protect your sensitive mail.

A post office box also helps keep your home safe when you are away on holidays by preventing mail accumulating.

Store safely

Physically

For legal reasons it is a good idea to retain copies of your tax returns and related financial statements for around seven years. These documents contain precisely the sensitive information that could enable your identity to be stolen.

To help protect your identity store these records in a lockable filing cabinet. And of course keep the cabinet locked with the key hidden away.

I know that we have so many locks these days that it can be considered inconvenient to lock things and hide the keys. So I was excited recently to find a very affordable small lockable key cabinet at my local hardware store. Yes it is more of a barrier than truly secure, but it is convenient and thieves do first need to find it. Plus it helps keep my young children out of places I don’t want them.

Electronically

Today many of our statements and records may be received electronically and stored on our computers. This is convenient and low cost. But if your computer is stolen or simply accessed while you aren’t around you could be giving up sensitive information.

Protect yourself by:

  • Password protecting your computer.
  • Storing these sensitive records in an encrypted folder on your computer.
  • Automatically locking your smartphone when not in use.
  • Securely erasing disk drives before discarding of old computers and USB drives. (Ask a geeky friend or relative to point you in the right direction.)
  • Create passwords/PINS that are not easily associated with you and your details such as date of birth, phone number and age.
  • Only allow trusted close friends to EFT money directly into your bank account.

Encryption is easier than you may think. Most modern computer operating systems (e.g. Microsoft Windows) have an inbuilt encryption facility that enables you to selectively encrypt folders.

Many of us now have smartphones and use the apps to store documents and access websites that contain sensitive personal information. For convenience often these apps automatically remember your logins and passwords. So ensure that you lock your smartphone when it is not in use.

Update on 2nd April 2011: New research has shown that “over half of secondhand mobile phones retain important personal data of the original owner”. So ensure you  format the phone’s memory and destroy your SIM card before discarding it.

Share birthday wishes privately not publically on Facebook, Twitter and other social media. Even just saying “happy birthday Matt” on Facebook gives away the day and month of my birth. Adding the personalisation of my age is a nice touch, especially on a milestone birthday, but it gives away my entire date of birth.

Shred before discarding

National Identity Fraud Awareness Week promotional flyerDocuments containing the following sensitive information should be shredded before being placed in the rubbish bin:

  • Account details (of anything where money can change hands)
  • Dates of birth
  • Tax file, Centrelink and Medicare numbers

Personally I like to shred statements and letters referencing any account details for anything. This includes all bank, investment, superannuation and insurance products, plus utility bills.

Protect your identity and the environment

If like me you like to recycle paper then I recommend you buy a compost bin. I discovered recently that putting shredded paper into our composter helps to keep it balanced and healthy. Plus composting saves us money.

Other tips from NIDFAW

The partners in National Identity Fraud Awareness Week suggested these additional tips:

  • Check your account statements regularly and look for any unusual or unauthorised activity.
  • Subscribe to an ID theft protection/monitoring service such as Secure Identity that allows you to proactively monitor your credit file for fraudulent activity and be able to react swiftly should you become a target for ID theft.
  • Contact your credit card company and banking institution before departing for travel, or your travel may prompt a block on your account.

For more information on how to protect yourself from identity fraud, and how to cope if you are a victim of ID fraud, visit the official campaign website www.stopIDtheft.com.au or www.crimestoppers.com.au for more information.

Got your own story or extra tips?

Have you been the victim of identity theft or know someone who has? If so, please share your extra tips for how to prevent what happened to you. You can do so in the comments below. (Share it anonymously if you prefer to protect your identity.)

Article sources include:
* National Identity Fraud Awareness Week (NIDFAW) media release.
* Fellowes (2010), Newspoll Survey, Australia – ID Fraud Awareness, conducted on a national online study with a sample of 1211 people aged 18-64 years.

The annual cost of retirement

If you struggle to define your retirement planning target one initial starting point can be to consider how much current retirees spend each year. Here the Westpac ASFA Retirement Standard is helpful, and it has just been updated.

An essential ingredient in successfully creating wealth is your purpose – particularly one that motivates you.

One of the common purposes of wealth creation is to accumulate enough money that you can make work optional (aka “retirement”.) This is your point of financial independence, whether you choose to cease working or not.

In my financial planning experience most people can’t tell me how much money they’d like to be able to spend in retirement. Without a clearly defined target the task of working out how much you need to save each year is quite difficult. And online retirement calculators can’t help you as they require a target input too.

If you struggle to define your retirement planning target one initial starting point can be to consider how much current retirees spend each year. Here the Westpac ASFA Retirement Standard is helpful, and it has just been updated.

Retirement cost of living

As at the end of the June 2010 quarter a couple needed approximately $53,500 per year to live comfortably in retirement (per household). Couples living more modestly survived on approximately $30,400 per year.

A single retiree required approximately $39,000 per year to live comfortably.

The Westpac ASFA Retirement Standard assumes the retirees own their own home. It defines a modest retirement lifestyle as “better than the Age Pension, but still only able to afford fairly basic activities.”

A comfortable retirement lifestyle is defined as: “enabling an older, healthy retiree to be involved in a broad range of leisure and recreational activities and to have a good standard of living through the purchase of such things as; household goods, private health insurance, a reasonable car, good clothes, a range of electronic equipment, and domestic and occasionally international holiday travel.”

You can obtain detailed budget break downs on the ASFA website. The Westpac ASFA Retirement Standard is updated quarterly.

If you are using this information in a retirement calculator remember to increase the amount each year in line with inflation. Some calculators do this automatically.

Is residential property over, under or fair value?

Graphs, graphs and damn statistics!

There is no shortage of articles quoting one “expert” or another about whether or not Australian residential property is currently in a bubble, ripe to boom again or just fair value. Every article seems to be accompanied by a barrage of graphs and statistical quotations to justify the author’s point of view.

If your eyes glaze over at the detailed graphs don’t worry, you’re not alone, often mine do too. I sometimes wonder (suspect) if the detailed graphs are purposeful anaesthesia to make the reader compliant to the author’s conclusions. (Hmm, I think that sentence may have done the same…)

Overvalued or fair value or…?

Who cares?

Really in the scheme of things if property is over or under-valued matters most if you are taking a short term trader’s view – trying to make money within a short time frame from a volatile asset.

What matters more is that new residential property investors are increasingly reliant on a continuing price boom in order to make a reasonable total return on investment (ROI).

With property prices and rents at current levels residential property investors make significant annual net income losses (even after tax returns). That creates a situation where a high capital growth is required to repay the debt, offset income losses and retain a reasonable return on equity.

Yes, my generation and those with an investing memory of about 15 years may say that residential property does generate really high capital growth. But the fact is that all you can say is that over that period it has done.

Can residential property continue to deliver high annualised capital growth over coming decades?

My helicopter view

Value is in the eye of the beholder. People seem to be willing to pay whatever they can to get something they really want. And Australians really want their own home – and a comfortable one at that.

In the last decade the amount of people bidding for property and their ability to pay has rapidly increased for reasons such as:

  • Ability and willingness to borrow higher percentages of income.
  • Ability to borrow higher percentages of the property value, meaning you needed to have saved less before you could compete in the market.
  • Grants to property purchasers.
  • Commencement of lending to a lot of the population previously shunned (e.g. employed yet unmarried females of baby-making age; and those with limited or mixed financial history.).

Consequently in many of our memories we have seen stellar above-average capital growth.

Can that ability and willingness to pay increase as rapidly over the next 40 years and thereby support continuing stellar capital growth?

It would require 40 years of:

  • Above average wages growth
  • Increased percentage disposable income through reduced lifestyle expenses (less kids and more frugal living – yeah right!)
  • Low interest rates
  • Increased willingness to lend by the banks
  • More crazy Government subsidies

I’m not an economist so I don’t even pretend to have a crystal ball. But my rational mind says that in the long term gravity will kick in and force a return to normal long-term growth rates.

Therefore I expect that at some time there may be a sustained period of sideways or even negative growth (i.e. price declines.)

Predicting when that will occur matters most if you are taking a short term trader’s view.

I welcome your thoughts, reaction and responses to my view which you can in the comments section below.