Self-managed superannuation funds (SMSFs) are a type of trust. This means that one or more trustees must be appointed to control the fund. But who is best placed to act in this important role? There are several important considerations to give thought to when deciding who should be the trustee(s) of an SMSF. As lawyers, we are often asked whether the trustee should be a corporate trustee (a company). This article explores some of the key things to think about when considering the best type of trustee for an SMSF.
When it comes to SMSFs, it is important to understand the rules about who can act as a trustee of the Fund. For example, an SMSF must have at least 2 individual trustees or a corporate trustee. There are a variety of other requirements which must be met and our article on single member SMSFs which can be found here contains some further insights about trustee requirements for SMSFs.
The summary below offers some insights into the things to consider when deciding between individual trustees or a corporate trustee.
Individual trustees
- Establishment costs - Generally, no extra costs associated with the appointment of individual trustees when establishing an SMSF.
- Ongoing costs - Usually slightly lower ongoing cost that a corporate trustee.
- On a member’s loss of capacity or death - Death or loss of capacity of an individual trustee may be more challenging to manage that for funds with a corporate trustee.
- Operating efficiency - Oftentimes less efficient administration. When a member leaves / loses capacity to act as a trustee or dies, then then changes will need to be made to assets as individual trustees are named as such in ownership records.
- Separation of personal and SMSF assets - Separation of asset may be less clear.
- Borrowing arrangements - Subject to bank requirements, may not be able to use an individual trustee arrangement when engaging in a limited recourse borrowing arrangement (LBRA).
- ATO – SMSF administrative penalties - Individual liable for individual trustees - For example, if an SMSF with 2 trustees and a penalty of 10 units (at $275 per unit), then the amount payable would be $2750 by each trustee (total - $5,500). Many offences carry 60 penalty units which presently would be $16,500 payable by each trustee. For a six-trustee fund this could mean $99,000 in penalties per offence.
- Trustee protection - Generally less protection that a corporate trustee structure. Also see ATO – SMSF administrative penalties above.
- Single member funds still require two individual trustees so this will mean bringing a non-member in as a trustee.
Corporate trustee
- Establishment costs - Cost involved in set up of a corporate trustee including ASIC registration fees. Directors will need to obtain a Director’s ID.
- Ongoing costs - Generally, slightly higher ongoing fees including annual ASIC fees.
- On a member’s loss of capacity or death - A corporate trustee will continue on death. Usually, the succession of a corporate trustee is easier than with individual trustees.
- Operating efficiency - If a member leaves / loses capacity or dies, then as the company holds the assets there will only be a need to update ASIC / change directors. No changes will need to be made to the ownership of assets, for example. This usually means greater efficiency that with an individual trustee structure.
- Separation of personal and SMSF assets - Can be an easier way to separate personal and SMSF assets.
- Borrowing arrangements - Many banks will insist on a corporate trustee where there are SMSF LRBA arrangements.
- ATO – SMSF administrative penalties - Joint and several liability for directors. For example, for a corporate trustee with a 10 penalty unit offence at $275 per unit, the amount payable will be $2750 total regardless of the number of directors.
- Trustee protection - Directors of a corporate trustee will have more protection as the corporate trustee company will have limited liability.
- Single member SMSFs – A single member fund can have a corporate trustee with the member as the sole director of the corporate trustee.
The summary above contains just some of the things to think carefully about when considering whether a corporate trustee or individual trustee structure is right for a fund. A corporate trustee can be established either when the fund is set up (which is preferred) or clients may opt to change from an individual trustee arrangement to a corporate trustee an any time during the life of the SMSF. It is best to seek advice to determine the best option from the outset to avoid the financial and time involving in setting up a corporate trustee and changing the trustee of the fund at some later stage.
Appointing the right type of trustee for the fund is an important decision and should be undertaken with the benefit of holistic advice from a trusted team of legal, financial and taxation experts. At HopgoodGanim Lawyers, we have a dedicated Superannuation team who can provide advice on a range of SMSFs related issues. Contact us today for a discussion.