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When it comes to your setting up a self-managed super fund (SMSF), one of the first decisions is whether to choose a corporate or an individual trustee structure.
Both SMSF structures have pros and cons but whichever structure you choose every member of your fund must be a trustee.
The role of trustees
Trustees own and manage the fund’s assets on behalf of members and are responsible for its ongoing legal compliance with superannuation and taxation legislation.
These responsibilities include annual fund auditing, reporting and taxation obligations to the Australian Taxation Office (ATO). All SMSF trustees must sign a trustee declaration indicating they understand all their legal obligations.
According to the most recent ATO statistics, 63% of all SMSFs have corporate trustees and this structure is becoming increasingly popular. In the 12 months to June 2020, 81% of new SMSFs were set up with corporate trustees.
How a corporate trustee structure works
If you decide on a corporate trustee for your SMSF, a company must be set up to act as the trustee of the fund. Each of your fund’s members must be a director of this company, which must be registered with the Australian Securities and Investments Commission (ASIC). Ownership of all the SMSF’s assets is listed in the company’s name as the trustee.
Neither the corporate trustee nor any of its directors can be paid for their services. Importantly, all SMSF assets must be kept separate from the personal assets of fund members.
Companies are eligible to be SMSF corporate trustees provided that:
- They have not been deregistered by ASIC
- They do not have any directors or other responsible officers who are disqualified individuals (see the section below for the reasons why an individual would be disqualified from being an SMSF trustee)
- They have not had a receiver or provisional administrator appointed to manage their operations
- No action has been started to wind up the company.
How an individual trustee structure works
Under an individual trustee structure, ownership of all the SMSF’s assets is listed in the name of each individual trustee (on behalf of the fund). A company is not set up and registered for the purposes of being the fund’s trustee.
However, like corporate trustees, individual trustees:
- Cannot be paid for the services they provide to the fund
- Must keep their personal assets separate from those of the fund.
Individuals are eligible to be SMSF trustees provided they:
- Are not an undischarged bankrupt (or are not insolvent and under administration)
- Have not been convicted of an offence involving dishonesty
- Have not previously received a civil penalty under super legislation
- Have not been disqualified by a superannuation regulatory body (such as the ATO or the Australian Prudential Regulation Authority).
Key differences between corporate and individual trustees
In addition to how an SMSF is set up and how ownership of its assets is recorded, there are other key differences between a corporate and individual trustee structure.
We outline eight of these differences below.
1. Single-member versus multiple-member funds
Single-member funds have different trustee requirements to those with multiple members. A single-member fund with an individual trustee structure must have two individual trustees. This means that one of the trustees will not be a fund member.
However, a single-member SMSF can be set up with its lone member as the sole director of the company that is its corporate trustee. This means that a corporate trustee structure is the only option for people who want to manage their SMSF themselves. Alternatively, a second director (who is not a member of the fund) can be included in the corporate trustee structure of a single-member fund if this is what the member wants. The second director can’t be their employer unless they are a relative.
Any SMSF can be set up as either a single-member fund or one with two to six members under current legislation.
ASIC charges an initial company registration fee and an annual review fee for SMSFs with a corporate trustee. This review fee is higher if the corporate trustee performs any other function besides being the corporate trustee for the SMSF.
SMSFs with individual trustees are not charged any set-up or ongoing fees by ASIC. They can often have lower set-up and ongoing costs as a result.
3. Members joining or leaving
If there is an SMSF membership change such as an existing member leaving or a new member joining, a fund with an individual trustee structure will need to have its asset ownership documents changed accordingly. This is because the assets are registered in individual trustee names. This can be costly and time-consuming.
By comparison, SMSFs with a corporate trustee don’t need to change ownership documents if there’s a change of membership. This is because assets are registered in the company’s name.
4. Separation of assets
The requirement that SMSF assets be kept separate from members’ individual assets can also be easier to achieve with a corporate trustee. This is because the assets are registered in the company’s name, rather than in the names of individual fund members.
A corporate trustee structure with more than one director may also have advantages if a fund member dies or becomes incapacitated and remaining members wish to keep the fund up and running. This is because a company can continue operating with just one director, but you need a minimum of two trustees under an individual trustee structure.
An SMSF with an individual trustee structure will need to have a succession plan in place to continue operating in these circumstances.
6. Trustee penalties
SMSF fund trustees are liable for heavy penalties if they breach super and tax legislation. Yet penalties for the same offence are likely to be more severe for funds with individual trustees because the penalty is applied to each trustee individually.
With a corporate trustee, a single penalty is applied to the company involved. The directors of the company then share the penalty.
A corporate trustee may also provide greater legal protection for an SMSF member’s assets than an individual trustee structure. Due to the limited liability of companies, corporate trustees have limited financial liability if they are personally sued.
When it comes to limited recourse borrowing arrangements, many lenders prefer SMSFs to have a corporate trustee because it offers better asset protection to an SMSF at risk or in debt.
SMSFs are permitted to borrow for investments under limited recourse borrowing arrangements. This arrangement means the loan is taken out by the trustee on the fund’s behalf and the asset is held in a separate trust. If there is a default on loan repayments, the lender’s recourse rights are limited to the asset purchased with the loan, not to any other SMSF assets.
Every member of an SMSF must be a trustee of their fund. This means they are legally responsible for ensuring the fund’s compliance with super and tax legislation. SMSFs must be set up with either a corporate or individual trustee structure.
It’s best to seek independent professional advice about which structure is most appropriate for your needs. The information contained in this article is general in nature.