SMSFs – Individual or Corporate Trustee? Know your options

For investors with a self-managed super fund (SMSF), or those considering establishing one, a key decision is whether to utilise an individual or corporate trustee structure. The structure you choose can have several lasting implications for how you administer your fund, the rules you need to abide by, and costs (among other things), therefore, it’s important to understand each structure carefully.

What is a trustee?

An SMSF is a special type of trust created and managed in accordance with superannuation legislation. In a retail or industry fund, a board of trustees makes the decisions for all fund members, but in a self-managed super fund, each member is also a trustee, or a director of the SMSF trustee company. This allows the member to make key decisions regarding the fund and its investments.

Understand the differences. Make the right choice.

In managing your SMSF, you will need to choose between using an individual or corporate SMSF trustee structure. With an individual structure, each member acts as the trustee, but with a corporate structure, a company acts as the trustee of which the fund’s members are Directors. While an individual SMSF trustee may sound more straightforward than a corporate SMSF trustee initially, it may not necessarily be the most efficient option in the long-term. It is important to note that there are options for existing SMSF trustees to change an SMSF from an individual to corporate trustee structure.

How an individual SMSF trustee works

An individual trustee SMSF structure has:

• Trustees who are individual people (as the name suggests)
• Each trustee is a member
• At least two trustees, with a maximum of six
• No more than six members who must also be trustees and cannot be employees of another member of the fund, unless they are related
• Assets registered in the name of the individual trustees and owned in trust for the members of the SMSF

Some of the benefits of an individual trustee structure include:

• The set-up costs are lower compared to a corporate structure
• Generally lower ongoing running costs compared to a corporate trustee

On the other hand, an individual SMSF trustee structure also has some disadvantages, such as:

Always needing to have two trustees, which can be problematic for succession planning (e.g. where there are two members, and one leaves or passes away)

• It may be cumbersome to add or remove members and change the ownership of your assets
• Having trustees as the legal owner of assets may lead to SMSF and personal assets inadvertently being mixed
• Declarations of trust may be required for certain asset types, such as property

Australian Tax Office (ATO) administrative penalties apply to each individual trustee. This can result in penalties of up to four times that of a corporate trustee.

How a corporate SMSF trustee works

A corporate trustee SMSF structure has:

• A company that is set up to act as the legal trustee with no more than six directors in the company
• No more than six members who must also be directors of the company and cannot be paid or employees of another member of the fund, unless they are related
• Assets registered in the name of the company

The benefits of a corporate SMSF trustee structure include:

• It can be easy and more cost effective to add or remove directors/members
• Legal ownership of assets does not change when a director/member is added or removed
• It’s the only option if you want to manage your SMSF by yourself (noting an individual trustee structure requires at least two trustees)
• There may be fewer problems for succession planning where you have two members and one passes away, as the remaining member can stay as the sole director of the trustee company
• Australian Tax Office (ATO) administrative penalties apply to the corporate trustee, not each individual director

Alternatively, SMSF corporate trustees also have some disadvantages, including:

• Additional expenses – because you’re setting up a company, there may be more establishment and running costs involved (unless you set up a special purpose company whose only purpose is to act as your corporate trustee; in this case, the running costs can be reduced, and you don’t have to lodge an additional tax return for the company, only for your SMSF) your SMSF is also bound by corporation legislation.

Weighing up the different SMSF trustee structures

An SMSF can provide you with more choice and control when it comes to managing your retirement wealth. However, you need to ensure that your SMSF trustee structure complements your overall financial goals, and this isn’t always easy to work out on your own.

Before proceeding with your decision, we encourage you to discuss these questions, among others, with your family and Adviser:

1. Are you aware of all the associated costs and regulatory implications for each SMSF trustee structure?
2. What assets do you wish to invest in (e.g. property or shares)? Some structures are better suited to different types of investing.
3. What would happen if one of the trustees were to leave the fund or pass away?
4. Will you have other assets outside of your SMSF? And what protections do you have in place to protect these in case a claim is made against your fund? In an individual structure your assets outside of your fund are not protected from liability claims.

Overview

An Evans and Partners financial adviser can help assess the suitability of each trustee structure for your circumstances. A specialist SMSF accountant can also support trustees of SMSFs with preparing financial statements and tax returns, coordinating the annual audit and actuarial certificates, commencing and maintaining pension accounts and liaising with the ATO and ASIC. Together, we can assist in outlining the correct structure for your circumstances and implementing this choice.