SMSF Matters: Corporate Vs Individual Trustees
When establishing an SMSF, members must decide whether to select a corporate or individual trustee for the Fund. The decision holds significant implications for the Fund’s long-term operation and running costs.
And, while the trustee structure can be changed during the SMSF’s lifetime to satisfy individual circumstances, the latest data from ATO finds two-thirds (66%) of SMSF funds have a corporate trustee.
Indeed, most SMSF experts recommend this structure for various reasons. Making a call on the best trustee structure for you, however, all depends upon your situation now, and in the future.
Introducing Corporate and Individual Trustees
A corporate trustee is a ‘special purpose company’ which may be established with the sole purpose of acting as trustee of the Fund.
For Funds with more than one member, the corporate trustee can have between two and six directors - each a trustee of the SMSF. A single-member fund can have one or two directors.
Anyone over 18 can be an individual trustee of an SMSF including a spouse, adult child or friends who are responsible for running the SMSF. Under an individual trustee structure, a single-member SMSF must have two trustees. Meanwhile, an SMSF with multiple members can have between two and six individual trustees.
Individual Vs Corporate Trustee Requirements
Multiple Member Funds
Individual Trustees
- 2 to 6 members.
- Each member of the fund must be a trustee and each trustee must be a member of the fund.
- A member can’t be an employee of another member unless they’re relatives.
- Some states and territories restrict the number of trustees a trust may have to less than 6. Since an SMSF is a type of trust, clients should seek professional advice to understand if they’re impacted and if you should structure/restructure your SMSF to have a corporate trustee.
Corporate Trustees
- 2 to 6 members.
- Each member of the fund must be a director of the corporate trustee, and each director of the corporate trustee must be a member of the fund.
- Directors of corporate trustees need to have a Director ID.
- A member can’t be an employee of another member unless they’re relatives.
Single Member Funds
Individual Trustees
- There must be 2 trustees.
- One trustee must be a fund member.
- If the fund member is an employee of the other trustee, the fund member and the other trustee must be relatives.
Corporate Trustees
- The corporate trustee company can have one or 2 directors (maximum).
- The fund member must be the sole director or one of the 2 directors.
- Directors of corporate trustees must have Director IDs.
- If there are 2 directors and the fund member is an employee of the other director, the fund member and the other director must be relatives.
Succession Planning Factors
A critical point of difference between individual and corporate trustees is that SMSF members die, whereas a corporate trustee does not. This simplifies the operation of the SMSF, allowing SMSF members to join and leave the Fund.
To explain: under an individual trustee, any change in SMSF membership – including the death of a member - requires the titles of all assets held by the Fund to be changed.
A corporate trustee, meanwhile, enables members to come and go without impacting the trusteeship – only the directorship of the company changes. This offers more flexibility for not only death but also common circumstances like divorce, marriage or the appointment of a legal representative if a member becomes ill.
Individual Vs Corporate Trustee: Setup and Ongoing Costs
Setting up a corporate trustee does attract more up-front costs. ASIC currently charges more than $500 to register a special purpose company and an annual fee of $61, which can be paid from the SMSF.
While it is generally cheaper (or free) to establish an individual trustee for an SMSF, costs often add up over the lifetime of the Fund due to administrative requirements. For example, costs add up in legal advice regarding procedures to remove or appoint trustees, in addition to updates to SMSF asset registers once members have changed.
Individual Vs Corporate Trustee: Handling Disputes
Even single-member SMSF Funds enjoy perks under a corporate trustee structure.
A single-member trustee can be the only director of the company and have full control over the running of the SMSF. If operating under an individual trustee structure, however, another individual will be required to act as a second trustee. This person doesn’t have to be a member of the SMSF, but they must assist in the running of the SMSF.
Such circumstances require the member to relinquish some control over the management of the super to another. It’s worth noting that, if disagreements regarding fund management arise between individual trustees, all decisions must be unanimous. Meanwhile, when disputes occur amongst directors of a corporate trustee, a majority rule can be used.
Individual Vs Corporate Trustee: Separation of Entities & Protections
Super law requires assets held by the Fund to be recorded and kept separately from any assets held personally by members.
Individuals acting as trustees of an SMSF hold assets of the Fund in their individual names. This not only bears some risk of SMSF and personal assets inadvertently becoming confused, but it also means they’re jointly and severally liable for any actions taken against the Fund.
A Corporate Trustee, meanwhile, satisfies the separation of entities requirement because the company is treated as a separate legal entity to Fund members. The Corporate Trustee has no personal money or assets, only SMSF money and assets, offering members better protections thanks to the limited liability of the corporate trustee.
If any superannuation laws are breached, administrative penalties are jointly shared by all directors, whereas individual trustees are personally liable for the fine.
Individual Vs Corporate Trustee: Borrowing Conditions
Most financial institutions prefer to establish an LBRA with a corporate, rather than an individual trustee and often require the trustee of the Custodian Agreement to also be an SMSF company. Further, corporate trustees often have a higher loan-to-value ratio (LVR), which improves borrowing capacity.
Changing from Individual to Corporate Trustee
Changing the trustee structure can be done without impacting the SMSF. In fact, a switch from individual to corporate trusteeship is often required when purchasing property or getting a loan, but a switch from corporate to individual trustee is also possible.
Every SMSF is different but in most cases, a review of prior deeds and a series of documents must be produced documenting the change and co-signed by all trustees. The ATO must be notified within 28 days of any change to trustees, directors of the corporate trustee, fund status or contact details.
The ATO reviews all SMSFs that change from an individual trustee structure to a corporate trustee structure as part of its 'secure front door' process. While the ATO conducts their review, the SMSF may be taken offline which can take up to 56 days to complete.
For support with your SMSF, complete the form below or contact us now: enquiry@primefinancial.com.au
