SMSFs: Individual or corporate trustee?
Nearly 80% of recently established self managed superannuation funds (SMSFs) operate under an individual trustee structure rather than a corporate trustee arrangement, according to statistics released by the ATO.
Although the latter is the less utilised option, does that mean it is the less wise choice? We examine the pros and cons of each trusteeship arrangement.
Benefits of the corporate trustee structure
Under an individual trusteeship, all SMSF assets must be in the name of all trustees.
Each time a member of a fund with an individual trusteeship dies, retires, loses capacity, leaves the fund or a new member joins the fund, trustees are required to amend the ownership of their investments by notifying all relevant share registries, banks and titles offices.
Complications may arise if your fund has numerous investments – particularly in real estate and shares – because a transfer of the new titles for all assets is likely to require a significant amount of time, effort and money. Trustees must also prepare a deed of appointment and retirement for each incoming and outgoing trustee.
Conversely, when a corporate trustee is utilised, the addition or retirement of a member of the fund requires only notification of a change of directors. The legal title of all assets remains in the company, which continues to act as trustee. All corporate trustees have to do is notify the Australian Securities and Investments Commission (ASIC) within 28 days of the change.
Number of members
According to trust law, a sole member fund, which has also a sole individual trustee, cannot exist. A sole member SMSF must have at least two individual trustees and while the second person does not have to be a member, they do have to be the member’s relative and be actively involved in the trustee decisions made in relation to the fund – a disadvantage if a trustee wants full control. Further, the incoming person would be required to sign a “trustee’s declaration”, which is designed to make trustees fully accountable for their actions and fund compliance.
Under a corporate trustee structure, a sole member SMSF can exist. An SMSF can have an individual who is both the sole member and the sole director of the trustee company.
Succession upon death
When an individual trustee leaves a fund or dies, the fund may face administrative difficulties, for example if it is reduced to a single member fund. However, a company has an infinite life span, and therefore the operation of a corporate trustee SMSF can continue even after the death of an individual SMSF member/director. Accordingly, a corporate trusteeship ensures greater flexibility for estate planning as the trusteeship does not change as a result of the death of a member.
Liability of the trustee
If an individual trustee is subject to litigation, their personal assets may be exposed if their right of indemnity against the SMSF is not sufficient to discharge the liability. On the other hand, if a corporate trustee goes into liquidation, only the company’s own assets are at risk while the fund’s assets are afforded greater protection against creditors.
Benefits of the individual trustee structure
Individual trustees do not have to complete ASIC forms in the event of a change in the fund and membership, nor ongoing ASIC annual reviews as corporate trustees do.
A corporate trustee also has to ensure that it adheres with both the constitution of the company and the requirements of the trust deed. While individual trustees also have to adhere to the requirements of their trust deed, they have fewer procedural issues to consider as there are more flexible requirements for holding trustee meetings.
Set-up costs and fees
The fund can be less costly to establish if you are an individual trustee as you don’t have to set up a separate company to act as trustee. The average establishment fee for an individual trustee is significantly less than that of a special purpose SMSF trustee company.
While establishing a company will be a substantial expense at the start, it will not be a significant ongoing cost. Moreover, ASIC annual company review fees are reduced for companies that have a sole purpose to act as a trustee of a regulated superannuation fund.
Both individual and corporate trustees have to lodge an SMSF annual return and pay an annual supervisory fee to the ATO. On top of that, corporate trustees have to pay an initial ASIC registration fee and a lesser ongoing annual review fee to ASIC.
Other annual costs for both trustees include optional financial adviser and accountant fees and the obligatory auditor fee. Both trustees have to appoint an independent approved auditor to audit the fund each year.
Penalty unit regime
Keep in mind that where penalties are levied according to the Superannuation Industry (Supervision) Act 1993 they are levied on the trustee, so each individual trustee can be hit as opposed to one corporate trustee. Of course one way to reduce this risk is to ensure your SMSF does not breach regulations and remains fully compliant.
Summary table of pros, cons and other differences
|Corporate trustee||Individual trustee|
|Asset ownership||If members are appointed or cease to be members, that person has to become, or cease to be, a director of the corporate trustee. There is no need for a change in the title to all assets as it remains in the name of the corporate trustee.||If a member is appointed or ceases to be a member, they need to become, or cease to be, a trustee. This will require the title of all assets to be transferred to the new trustee.|
|Number of members||Sole member corporate trustee SMSFs can exist. An SMSF can have an individual who is both the sole member and the sole director – ensuring full control of the fund.||Sole trustee/member SMSFs cannot exist. A sole member SMSF must have at least two individual trustees where the second person does not have to be a member but they have to be the member’s relative and be actively involved in the trustee decisions made in relation to the fund.|
|Succession upon death||A company has an indefinite life span. A corporate trustee structure can make control of an SMSF more certain in the event of a death/incapacity of a member.||Immediate action must be taken once a member has died to ensure the trustee/member rules are satisfied. See Asset Ownership above.|
|Liability of the trustee||As companies are subject to limited liability, a corporate trustee enjoys greater protection if a party sues for damages.||If an individual trustee suffers any liability, their personal assets may be exposed.|
|Red tape||A corporate trustee has to complete ASIC forms, ASIC reviews and adhere with both the constitution of the company and the requirements of the trust deed.||Individual trustees have to adhere to the requirements of the trust deed but do not have to complete ASIC forms in the event of a change or complete ASIC annual reviews.|
|Set-up costs and fees||Set-up costs for a corporate trustee are more than for an individual trustee. They also have to pay ongoing fees such as an annual review fee to ASIC.||Individual trustees can set up an SMSF at several times less the cost of a corporate trustee.|
|Penalty unit regime||Under superannuation law, each trustee can be fined so the sole corporate trustee can receive only one fine. There is also scope for penalties levied to be larger than an individual trustee.||Under superannuation law, individual trustees can each be fined in the event of a breach so there is potential for two or more fines.|
|Minor children members||Minor children members cannot be directors of a company – a mandatory requirement of a corporate trustee. However, a specific rule allows a parent or guardian of a minor child member to be a trustee-director in the minor member’s place.||Minor children members (under the age of 18) can be a member of the fund if a parent or guardian acts as a trustee on the child’s behalf.|
Having reviewed all options, can I change my current SMSF structure?
Yes, you can. However, bear in mind that as with any change, it will be necessary to amend the trust deed, report the change to the ATO and transfer all assets into the name of the new trustee. Regardless of what trustee structure you may choose, it is crucial you remain compliant. Talk to us if you require guidance.