- How an SMSF corporate trustee structure works
- How an SMSF individual trustee structure works
- The key differences between corporate and individual SMSF trustees
- The bottom line
SMSFs are trusts that must be set up with either a corporate or an individual trustee structure. Every member of an SMSF must either be one of its corporate or individual trustees.
Trustees own and manage the fund’s assets on behalf of members. They are responsible for ensuring its ongoing legal compliance with superannuation and taxation legislation. These obligations include annual fund auditing, reporting and taxation obligations to the Australian Taxation Office (ATO). All SMSF trustees must sign a trustee declaration indicating that they understand all their legal obligations.
According to the most recent statistics from the ATO, 57% of all SMSFs have corporate trustees and this structure has become increasingly popular in recent years. Since 2015, more than 80% of SMSFs have been set up with corporate trustees.
How an SMSF corporate trustee structure works
Under an SMSF corporate trustee structure, a company must be set up to act as the trustee of the fund. Each SMSF fund member must be a director of this company. The company 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 the services they provide to the SMSF. 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 SMSF individual trustee structure works
Under an individual trustee structure for an SMSF, ownership of all the SMSF’s assets is listed in each individual trustee’s name instead (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 an SMSF.
- must keep their personal assets separate from those of the fund.
Individuals are eligible to be SMSF trustees provided that 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 superannuation legislation.
- have not been disqualified by a superannuation regulatory body (such as the ATO or the Australian Prudential Regulation Authority).
The key differences between corporate and individual SMSF trustees
In addition to how an SMSF is set up and how ownership of its assets is recorded, there are a number of other key differences between a corporate and individual trustee structure. These differences are outlined below.
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 by 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 cannot 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 four members. This number is due to be increased to six from July 1 2019. Multiple-member SMSFs must not have any trustees who are not fund members (regardless of whether they have an individual or corporate trustee structure). This means that these funds can currently have up to four individual trustees (increasing to six on July 1 2019), or four directors in a corporate trustee structure (increasing to six on July 1 2019).
ASIC charges an initial company registration fee and an annual review fee for SMSFs with a corporate trustee structure. This review fee is higher if the corporate trustee performs any other function besides being the corporate trustee for the SMSF.
SMSFs with individual trustee structures are not charged any set-up or ongoing fees by ASIC. They can often have lower set-up and ongoing costs as a result.
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. It can therefore be costly and time-consuming to change asset ownership documents if there is a change in SMSF membership with an individual trustee structure.
However, ownership documents do not need to change if there is membership change for SMSFs with a corporate trustee structure, because the assets are registered in the company’s name.
Separation of assets
The requirement that SMSF assets be kept separate from the individual assets of fund members can be easier to achieve with a corporate trustee structure. 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 can better allow for an SMSF to continue if a fund member dies or becomes incapacitated. This is because a company can continue operating with just one director, and 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 for the fund to continue operating in these circumstances.
Trustees of any SMSF fund can be liable to heavy penalties for breaching superannuation and taxation legislation. However, the penalties for the same offence are likely to be more severe for SMSFs with an individual trustee structure. This is because the penalty is applied to each trustee individually.
Under a corporate trustee structure, a single penalty is applied to the company involved. The directors of the company share the penalty.
Companies have limited liability, meaning that corporate trustees are limited in their financial liability if they are personally sued. A corporate trustee structure therefore can provide greater legal protection for an SMSF member’s assets than an individual trustee structure.
SMSFs are permitted to borrow for investments under limited recourse borrowing arrangements. This arrangement means that 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.
Many lenders prefer SMSFs to have a corporate trustee structure in order to approve limited recourse borrowing arrangements.
Every member of an SMSF must be a trustee of their fund. This means that they are legally responsible for ensuring the fund’s compliance with superannuation and taxation 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 individual circumstances. The information contained in this article is general in nature.