Individual trustees vs corporate trustees part 2

In August 2010 the District Court of NSW made a judgement where the owner of a residential investment property was found liable for the death of a handyman. The owner of the 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 and the properties public liability insurance, then the individuals trustees themselves might be personally liable for any shortfall.

So if the SMSF only had investments valued at $200,000, no insurance on the property and the damages awarded were $1 million then the individual trustees themselves would have to pay the outstanding balance of $800,000.

How do you as trustee of a SMSF 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 – this 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 SMSF with a 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 SMSF trustee company 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 such as those highlighted within the article.

In addition to providing some protection from these rules, another benefit of a corporate trustee is that generally the bank will lend a SMSF with a corporate trustee more money than with individual trustee’s. The additional borrowing capacity further adds to the potential ongoing benefits of having a corporate trustee.

For more on individual trustees vs corporate trustees, read my article.