One of the first, and most important decisions you'll make in your journey to SMSF ownership, is whether your fund will have corporate or individual trustees. Either option holds pros and cons — but your unique needs, personal circumstances and financial objectives will be what guides your decision on which trustee structure may be best for your fund.
We explore the difference between corporate and individual trustees to help you make an informed decision.
The role of an SMSF trustee
A self-managed super fund is a trust that holds assets for the primary purpose of saving for its members' retirement. By law, a trustee must be appointed to every trust that operates in Australia, including SMSFs. The role of an SMSF trustee should not be taken lightly, as it is their duty to own and manage the SMSF's assets on behalf of the fund beneficiaries.
SMSF trustees are also legally responsible for ensuring that the fund remains in compliance with taxation and superannuation legislation at all times. In fact, they must sign a trustee declaration that indicates their understanding of their legal obligations.
SMSFs are regulated by the Australian Taxation Office (ATO), which can impose strict penalties for non-compliance. The trustee's responsibilities should be front of mind when selecting a trustee for your self-managed super fund.
What is an individual trustee?
An individual trustee structure is where the SMSF trustee is a natural person (or persons) and not a trustee company. However, nominating an individual trustee is not as basic as simply nominating a person at random; for SMSFs of two to six members, each member of the fund must be a trustee. Likewise, each trustee must also be a member of the fund. Unless they are relatives, a member cannot be an employee of another fund member.
If your SMSF is a single-member fund, there must be two individual trustees.
What is a corporate trustee structure?
Unlike an individual trustee, a corporate trustee is not a natural person but an Australian company or corporate structure. A corporate SMSF trustee structure is available for SMSFs with two to six members, and each fund member must be a director of the company (and, likewise, each director must be a member of the fund).
This means that typically, a company is set up to act as the trustee of the self-managed superannuation fund. The company must be registered with the Australian Securities and Investments Commission (ASIC), and each director must have a Director Identification Number (Director ID).
For single-member funds that wish to have a corporate trustee, the sole member can be the sole director of the trustee company.
The difference between a corporate trustee structure and having individual trustees
There are many differences between an individual trustee structure and holding SMSF corporate trustees. We take a look at some of the main differences below:
Cost
Under an individual trustee structure, there are no ASIC fees, meaning there are fewer administrative requirements and establishment costs. There are, however, ASIC fees that apply when registering a corporate trustee. ASIC also charges an annual review fee.
A sole-purpose corporate trustee is where a company is established to act as the SMSF trustee solely. In this instance, ASIC charges a lower annual review fee.
Ownership of fund assets
All the assets owned by a self-managed super fund must be under the title of the current trustees 'as trustees for' the SMSF fund name. For this reason, if the fund has individual trustees and a trustee is added or removed, the titles of the SMSF assets must be changed.
This can lead to time-consuming and complex administration and prove to be a costly exercise, as most financial institutions and state government authorities charge fees for title changes on assets.
Under a corporate trustee setup, changes in fund membership and the registration of assets can be more straightforward. If a member is introduced or exits the fund, they either become or cease to be a director of the trustee company. While this means that ASIC must be notified of the change of director, there is no title change on the assets, as the corporate structure holds the title to all assets.
Asset separation
As mentioned above, the fund's assets must be in the fund's name. This means that the assets can't be combined with personal assets. However, if a trustee is sued for damages, the personal assets of individual trustees may be at risk. For this reason, holding a corporate trustee provides greater asset protection for the directors, as liability claims are generally limited to the assets in the name of the corporate trustee.
Providing limited liability for the directors is one of the main drawcards for many who choose to have corporate trustees.
Succession implications
Succession planning forms an important part of self-managed superannuation fund ownership. More certainty is provided for corporate trustee funds around the control of the SMSF and the SMSF assets in the event of the death or incapacity of a member. For individual trustee funds, there is a high likelihood that the fund would cease to operate if a member passes away unless an appropriate succession plan was already in place.
For funds with individual trustees, the trust deed dictates who'll control the fund after the death or incapacity of a member. In contrast, the company constitution dictates control for corporate trustee structured funds.
Frequently asked questions about individual vs corporate trustees
Does a corporate trustee need an ABN?
A corporate SMSF trustee must be an Australian company, therefore, it will hold an Australian Company Number (ACN) and must be registered with the Australian Securities and Investment Commission (ASIC). The SMSF itself, though, will have an ABN.
Does a corporate trustee need to lodge a tax return?
If the trustee company is considered a sole-purpose corporate trustee, then there is no need for the corporate trustee to lodge a tax return or financial statements for the corporate structure itself. That being said, the trustees are still responsible for ensuring that the fund lodges an annual tax return.
How do I set up a corporate trustee?
To set up a corporate trustee, you must first follow the steps to register a company in Australia.
Can an individual trustee be paid for their services or duties?
Neither individual trustees nor the directors of a corporate trustee company can be paid for their duties as a trustee.
What does central management and control mean?
Central management and control relates to the requirements for ensuring that the SMSF qualifies as an Australian superannuation fund. To receive tax concessions for your SMSF, it must be a complying fund — and in order to be a complying fund, the SMSF must satisfy the residency test.
The residency test requires that the central management and control of the SMSF is in Australia. This means that the strategic decisions for the fund are regularly made in Australia in addition to the high-level duties and activities of the fund.
How to choose the right SMSF trustee structure for your fund
Choosing whether to appoint an individual trustee or corporate trustee is not a simple process. It takes significant consideration of your personal circumstances and objectives — what is the right decision for one fund may not work for another. Looking at the advantages vs the disadvantages of either structure may also be insufficient in helping you determine which structure is best, as what's an advantage for some, may be a disadvantage for others.
Try considering:
- How many fund members your SMSF is likely to have, and whether it is a sole member fund.
- Whether you would like the fund to continue operating should a trustee pass away.
- The costs (and potential costs) associated with each SMSF structure.
- Whether you or any fund member is likely to reside overseas, and how you will evidence central management and control of the fund.
- What fund assets you'd like the fund to ideally hold. For example, an SMSF that wishes to borrow to invest must establish a limited recourse borrowing arrangement (LRBA). Lender requirements for limited recourse borrowing arrangements typically stipulate that the SMSF must have a corporate trustee.
- SMSF trustee structures, and indeed the ongoing management of self-managed super funds, can be a legally and financially complex process. Professional advice from a taxation, financial or legal practitioner can ensure that your fund can meet its trustee requirements.
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