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Ask Colley – How to choose an SMSF structure - individual or corporate?

Jan 13, 2021, 17:41 PM by   Graeme Colley

By Graeme Colley

Graeme Colley SuperConcepts SMSF expert

Whether an SMSF has a corporate or individual trustee structure, either option can come in useful where the fund has only one member or for purposes of paying benefits from the fund. The right time to think about the appropriate structure is when the fund is established, but there is nothing stopping the trustee being changed from an individual trustee to corporate trustee, or vice versa, as circumstances change.

Deciding on a trustee structure

The superannuation law sets out the basic rules for structuring an SMSF, which includes having a trustee. It is possible for the SMSF to have one of two possible trustee structures, either individual trustees or a corporate trustee. It is best to decide on the trustee structure at the time the SMSF is established, however, there is usually nothing to stop it being changed at a later date.

There are many considerations to determine whether an SMSF should choose to have individual trustees or have a corporate trustee. This can include administrative efficiencies, legal liability, asset protection, succession planning and cost. As trustees are equally responsible and liable for managing the fund, they need to be comfortable sharing these responsibilities with the other fund trustees.

A corporate trustee can have a sole director with full control over the fund, while a fund with individual trustees will need to have at least two individual trustees. For this reason, a corporate trustee is preferable for an SMSF with a single member.

As an example, an SMSF with two members could have the following trustee structures– individual or corporate.

How does a corporate trustee structure work?

  • A company is established to act as trustee of the fund.
  • The company can have between one and four directors.
  • Directors cannot be remunerated for their services as trustee.
  • Directors must be members of the fund, except where the fund has a single member and in addition to the member being a director, a second person is appointed as a director – the second person is not required to be a member of the fund.
  • Members cannot be employees of other members unless they are relatives.
  • Fund assets are registered in the name of the trustee company in its capacity as trustee of the fund.

How does an individual trustee structure work?

  • The trustees are individuals.
  • The fund can have between two and four individual trustees, however, there are potential changes to the legislation that may increase the maximum number of members to six.
  • Trustees cannot be remunerated for their services as trustee.
  • Trustees must be members of the fund, except where the fund has a single member and in addition to the member being a trustee, a second person is appointed as a trustee – the second person is not required to be a member of the fund.
  • · Members cannot be employees of other members unless they are relatives.
  • · Fund assets are registered in the name of all the individual trustees in their capacity as trustee of the fund.

Below are some of the issues to consider when determining which trustee structure to select.

Administration efficiencies

All assets of the SMSF must be held in the name of the trustees in their capacity as trustee for the fund (i.e. <SMSF trustee name(s)> ATF <SMSF name>). When a fund has individual trustees, the assets are held in the name of all the individuals as trustees for the SMSF. For a corporate trustee, the assets are held in the name of the company as trustee for the SMSF.

All members are required to be a trustee or a trustee director. When there is a change in membership of the SMSF, i.e. either a new member joins or a member leaves the fund, there will be a change in the trustees or trustee directors. Changes in membership can occur upon marriage, divorce, death and mat include children of members as part of the fund. The ATO must be notified of this change within 28 days and any change must be made in accordance with the fund’s trust deed and the Superannuation Industry (Supervision) Act (SIS Act).

Where individual trustees are used, any change in trustee may be costly and time-consuming as the ownership details of all the fund’s assets must be changed. If the SMSF holds numerous parcels of shares with different registries or brokers, it may take time to make the required changes. If the fund owns real estate, a change of legal title may involve the fund incurring additional stamp duty. When it comes to changing the legal title of a bank account, generally the account will need to be closed with a new account established in the name of the new trustees – this often requires setting up new direct credit instructions with investment institutions.

If the SMSF has a corporate trustee, the advantage is that there is no change required to the ownership of the fund’s assets because the assets are owned in the name of the corporate trustee. The only change required is a change where are directors are appointed or removed from the trustee company.

The SIS Act requires there must be a clear distinction between assets owned by the fund and assets owned personally by individual trustees. Under most jurisdictions, trusts are not recognised under their name but under the name(s) of the trustee. This occurs with superannuation funds as they are recognised as special purpose trusts. When a superannuation fund makes an investment or purchases assets it may be recorded in the name(s) of the individual trustees, which can create a risk with the intermingling of fund assets with personal assets. In the case the SMSF having a corporate trustee, the danger of intermingling assets is significantly reduced if not eliminated.

Legal liability and asset protection

Trustees are individually and jointly liable with the other trustees for any legal actions taken against the fund. In some situations this may have the potential to place the individual trustees’ personal assets at risk of a legal challenge. A corporate trustee provides limited liability for the directors and shareholders of the company. This ensures litigation against the trustee of the SMSF is generally limited to the assets held in the name of the corporate trustee and does not extend to the directors of the company (unless they are fraudulent in their duties).

Perpetual succession and estate planning

An SMSF with a single member is required to have at least two trustees, one being the member and another who is not a member of the fund. The reason is that a trustee structure with a single trustee who is also the sole beneficiary of the trust is not a valid trust and therefore does not constitute a valid superannuation fund.

In the event of an individual trustee’s death (leaving one individual trustee remaining in the SMSF), another individual trustee must be appointed. This requires the legal title of all SMSF assets to be updated to reflect the new individual trustees of the SMSF and can be time-consuming and costly.

In the case where a director of the SMSF’s corporate trustee passes away, the corporate trustee continues being the trustee of the SMSF without the requirement for an additional director to be appointed. As a company has an indefinite lifespan – it doesn’t die. A corporate trustee can therefore operate with the surviving member who is also a director, therefore retaining complete control of the SMSF. A corporate trustee structure allows the fund to be passed down from one generation to another.

Trustee penalties

Under the ATO’s administrative penalties regime, the ATO can impose fines on trustees for breaches of the SIS Act. Administrative penalties cannot be paid for by the SMSF – trustees are personally responsible for their payment.

These administrative penalties apply per trustee. This means that a fund with four individual trustees will pay four times the amount compared to a fund with a corporate trustee company.

Cost considerations

There are additional costs in establishing a corporate trustee. There is an upfront establishment cost and an annual ASIC levy. A corporate trustee is generally established with ASIC as a special purpose SMSF trustee company, which means it is prohibited from trading. A special purpose SMSF trustee company obtains concessions from ASIC regarding its annual filing fees and is not required to prepare or lodge financial statements or an annual tax return.

As an individual trustee structure does not require the establishment of another legal entity, there are no company establishment costs or annual ASIC levy. Members should consider the additional upfront costs of establishing a corporate trustee versus the additional cost that will be incurred for a fund which has changes to individual trustees or converting to a corporate trustee in the future.

While there are some benefits for both individual and corporate trustee structure, the decision should be based on the members’ situation and needs.