Corporate Trustee SMSF - Individual trustees personally liable

I previously posted an article about the reasons why you need to use a special purpose trustee company for your SMSF (5 reasons why you need a company as trustee for your SMSF). A SMSF corporate trustee is the preferred option when setting up a new SMSF rather than using two or more individual trustees.

Back in 2010 there was an article in the Australian Financial Review (Case highlights need for public risk insurance) which illustrates the why an SMSF not only needs adequate insurance cover, but why it is essential that a corporate trustee SMSF is set up – especially when it comes to investing in property.

The basic gist of the article relates to a NSW court case where the owner of a residential investment property was successfully sued by the widow of a handyman who died while carrying repairs on the property.

Now, if the property was owned by a SMSF with individual trustees, and the damages payable exceeded the value of the SMSF investments (including the property) – then the individuals trustees themselves would be personally liable for any shortfall.

So – if the SMSF only had investments valued at $400k and the damages awarded were $1 million – then the individual trustees would have to cough up $600k – which would drive most investors to personal bankruptcy.

Losing your super and becoming personally bankrupt all in one hit is definitely not good!

How to protect yourself from these types of personal losses?

Insurance – you need to ensure that any properties have appropriate insurance that also covers public liability if appropriate.

Investment selection – if your SMSF is going to purchase an older property that is going to require a lot of renovation or maintenance it will be more likely that potential accidents and injuries can occur. Ensure that this is considered when it comes to selecting a SMSF investment property.

Corporate Trustee SMSF

Using a special purpose trustee company (corporate trustee SMSF) is the easiest and simplest method for SMSF trustees to protect themselves.

In the above real life example, if the property was owned by a fund with an SMSF corporate trustee, and the damages exceeded the value of the SMSFs investments, then the trustee company would have been liable for any excess amounts to be paid.

Typically when a special purpose corporate trustee SMSF is set up, it will issue shares to the directors (who are also the member of the super fund) – assuming two members each issued with a share valued at $1 each then you have what is sometimes referred to as a ‘$2 company’ – which is the most the members of the super fund can lose.

This type of legal protection is essential to all investors who want to use their super to purchase investment property.

It is virtually impossible to eliminate all risk when investing, and this is especially the case when it comes to investing in property, however the correct structure can minimise potential personal losses like our unfortunate friend the the AFR article is facing.