When establishing a self-managed superannuation fund (SMSF), one central decision to be made early on is if the trustee structure is to consist of individual trustees or a corporate trustee. Between these choices, you can generally have up to six individual trustees, or one company that acts as trustee (with that incorporated body generally having up to six directors).
There are differences between these two structures, which can matter depending on your circumstances and outlook on effective retirement savings. The decisions to be made when choosing between the two choices relate to member/trustee requirements, some costs, how assets are to be owned, possibly penalties, and ultimately any succession considerations.
Requirements for a Self-Managed Superannuation Fund
For individual trustees, a fund is generally required to have two to six members, with each member of the fund also a trustee and vice versa (with an exception for single-member funds, see below). A member cannot be an employee of another member — unless they are relatives.
With a corporate trustee, there needs to be one to six members, with each member of the fund a director of the corporate trustee and vice versa. Again, a member cannot be an employee of another member — unless they are relatives.
For single-member funds with individual trustees, there must be two trustees, one of which must be the fund member. If that member is an employee of the other trustee, they must be relatives.
For single-member funds with a corporate trustee, the trustee company can have one or two directors, but no more. The fund member must be the sole director or one of the two, and if there are two directors and the fund member is an employee of the other, the member and the other director must be relatives.
Cost associated with SMSF
Individual trustees cost less because there are no fees to be paid to ASIC for incorporation, which includes establishment and administrative costs. Note: a trustee cannot be paid for their duties and services as a trustee.
Corporate trustees on the other hand are charged a fee to register with ASIC, as well as an annual review fee. There is a reduced fee if the incorporated body acts solely as a super fund trustee, or a higher fee applies if the company acts in any other capacity, such as trustee of a family trust. A corporate trustee cannot be paid for its services, and its directors cannot be paid for their duties or services in relation to the fund.
Asset ownership of SMSF assets
If individual trustees are appointed or removed, the title to the SMSF assets must be updated accordingly. This can take time and can be costly, particularly if changing the title to real estate property.
For corporate trustees, recording and registering assets can be simpler, particularly for changes in membership — the corporate trustee doesn’t change, so the titles of the SMSF’s assets are unchanged. When a person starts or stops being a member of the SMSF, they become, or cease to be, a director of the corporate trustee. It is required however to notify the ATO and ASIC of any change in directors.
Separation of assets
An important aspect of SMSFs is that the fund’s assets must be kept separate from any assets that members hold personally. With individual trustees, the funds’ assets must be held in the fund’s name and must not be combined with any member’s personal assets. It is the same for corporate trustees, however as the company (the corporate trustee) will have limited liability, there is greater protection should the trustee be sued for damages.
Penalty differences
If superannuation laws are breached, administrative penalties are levied on each trustee. Remember however that while a fund can have up to four individual trustees, the alternative structure results in one corporate trustee.
Take for example a fund that fails to prepare financial accounts and statements — a breach of the rules that results in a liability of 10 penalty units (each unit is currently valued at $313 from 1 July 2023). A corporate trustee would therefore be hit with a penalty of $3,130, but with six individual trustees, the fund is looking at a penalty of $18,780.
Succession Planning
If a fund has individual trustees and there are unexpected changes to the members – for example, a member passes away – action may be required to ensure that the fund remains compliant and is not in breach of the superannuation legislation. This can be an additional stress on the surviving trustees at a difficult time. In contrast, a corporate trustee would continue to act as trustee in the event of a member’s death, so there would be no need to change trustee structures or update the title of assets. With this situation, or even the incapacity of a member, control of the SMSF and its assets by the corporate trustee is more certain.
For any assistance with your SMSF contact our SMSF specialist Derek Bouman.
