Financial advisers could be professionally negligent if they did not advise clients to set up their self-managed superannuation funds (SMSFs) with corporate trustees, a specialist lawyer has said.
Townsends Business & Corporate Lawyers principal Peter Townsend said the arguments for a corporate trustee were so compelling and the possible detriments of not having one were "so substantial that the adviser will need a very good reason to allow their client to use an individual trustee".
Only 25 per cent of SMSF funds had a corporate trustee, according to the Australian Tax Office statistics.
"There has even been a noticeable shift away from corporate trustees, with 90 per cent of newly registered SMSFs in the year ended 30 June 2011 established with individual trustees," he said.
Over the three years to 30 June 2011, there had been a 1.5 per cent decline in SMSFs registering with a corporate trustee.
"Frankly, this is madness," Townsend said.
The appointment of a corporate trustee was cheaper in the long run, avoided potentially high costs of transfer of assets on change of an individual trustee, and avoided the New South Wales issue of whether to register the change of trustee deed.
Such appointment also achieved a proper separation of assets, avoided the possibility of premature vesting when only one trustee/member existed, and avoided the fund being ineligible to qualify as a 'regulated fund'.
"Money saved by not having a corporate trustee is a false economy and advisers should not allow clients to adopt that false economy," he said.
Trustees had a duty under the Superannuation Industry Supervision (SIS) Act to keep assets of a fund separate from their personal assets.
While it could be administratively difficult to track personal assets as against fund assets, "if you get it wrong the outcome would be disastrous. A dedicated corporate trustee gets over that problem and the uncertainty".
Corporate trustees also avoided accidental vesting of the fund when one of its two members died. Under the rules of equity, when the sole trustee of a trust became the sole beneficiary of a trust, then the trust was said to merge, that is, it was no longer a trust.
Townsend said that although Section 17A of the SIS Act appeared to address this by allowing a single member/single trustee fund to continue for a short time, this was simply for the fund's compliance relating to tax concessions and it did not bind third parties.
"A SMSF that has had only one individual trustee at any time may find itself under challenge if the fund is involved in any court action whether it is in the family court, the resisting of a bankruptcy of a member, challenging a tax assessment, contesting an investment that has gone wrong or in other circumstances where the protection by the SIS Act of the fund's tenure may not be enough," he said.
SMSFs should also use a corporate trustee to avoid a constitutional challenge. Commonwealth regulation of private superannuation was achieved under the Commonwealth's 'trading or financial corporations' power and 'old age pension' power.
Section19 of the SIS Act set out the requirements for a regulated fund which included either that the trustee be a constitutional corporation or that the rules provided - as the sole or primary purpose - the provision of old age pensions.
If the trustee of the fund was an individual, then it failed the first requirement and therefore must meet the second requirement to be eligible to be considered a regulated fund.
"If a court at the request of an adversarial third party found that the sole or primary purpose was not old age pensions, then the fund could be held to be not capable of being a regulated fund under the act and therefore to be non-compliant and not eligible for tax concessional status," Townsend said.
