When setting up an SMSF one of the first decisions to make is whether to use individual trustees or a corporate trustee. As the assets of the fund must be in the name of the trustee going forward, this decision must be made before any accounts are set up or assets purchased.
Firstly, what is a trustee?
The trustee of an SMSF is the entity/entities that are in charge of the day to day maintenance and management of the fund. All funds are required to have a trustee. In most other funds like retail or industry funds the trustee is separate from the member, but acts on the member’s behalf. In an SMSF, the member acts as the trustee. This applies to whether the members are individual trustees or directors of a corporate trustee.
Using Individual Trustees
Cost: One of the most appealing considerations of using individual trustees over a corporate trustee is the fact that it is simpler and less costly to set up compared to having a corporate trustee. Since it is not necessary to establish a company, members are not required to understand and follow corporation law requirements.
At least two individuals: One thing to note is that there must always be at least two individual trustees, even if there is only one member. This may not suit those who wish to be the sole member of their fund, as it means that another individual has control over your superannuation and acts as a signatory on your accounts.
Adding or removing members: If new members are added to the fund or members leave, the trustee must be updated. This involves changing the trust deed of the fund and amending all account names and asset holdings of the fund to reflect the change. This can often cost as much as the original set-up of the fund.
If you don’t envisage any changes to the members of your fund, the individual trustee structure may be right for you due to its simplicity.
Using a Corporate Trustee
As its name suggests, having a corporate trustee involves the use of a company to act as the trustee of your fund. If you don’t already have a company you will need to set one up and this can involve extra cost. However, the extra cost at the beginning is often outweighed by the benefits of having a corporate trustee later down the track. The only requirement is that each member of the fund must be a director of the corporate trustee in order for the super fund to qualify as an SMSF. This comes with several advantages.
Administrative efficiency: If there is a change of fund members such as adding a new member, it is not necessary to change the name on the ownership documents for each asset that the fund holds. The trustee (i.e. the company) remains the name. The only requirement is that the new member is added as a director. This is a lot less hassle than when a member is added to a fund with individual trustees.
Estate planning and succession upon the death of a member: Similarly, where a member passes away, a company continues to function as trustee so that the SMSF can continue. At a time when the family is grieving, it is a lot easier and less costly to deal with the removal of a director, rather than updating the trustees and the ownership of all super fund assets.
Sole member funds: A company can have one director, so this structure is particularly useful for sole member funds. A member can act as the sole director of the corporate trustee, and therefore have complete and autonomous control over their super if they choose to have a sole member fund.
Are you looking to borrow money in order to purchase property in your SMSF? Many lenders require that the fund have a corporate trustee before they will consider lending.
Finally, members using a corporate trustee have a greater level of personal asset protection as the use of a company as a trustee restricts liability to assets within the SMSF. Individuals acting as trustee of the fund are jointly and severally liable for any legal action taken against the fund, as they hold the assets of the fund in their individual names.
A few frequently asked questions on trustees.
My fund currently uses individual trustees; can I change to a corporate trustee?
Yes, but as mentioned above, it will involve a change of trust deed and the ownership of any assets held by the fund needs to be updated as well.
I already have a company. Can I use it as the trustee of an SMSF too?
Yes, as long as the members of the fund are also the directors of this company. If you use the company as part of a business please be aware that you cannot add directors of the company that aren’t members of the fund, and vice versa for removing directors. This may not suit your needs, and if not then another company should be used.
Is there an ongoing cost of using a company as trustee, compared to individual trustees?
Yes – there is an annual ASIC fee that needs to be paid. If the company only acts as a corporate trustee of an SMSF and has no other function, then the ASIC fee paid is a reduced amount. Check how much this costs for this year as it does change slightly over time.
Although the cost of using a corporate trustee is much higher upfront, there are numerous advantages which can outweigh the initial cost. Mainly it means that there is greater flexibility in what the fund can do going forward, whether to be a sole member, add members or borrow to purchase an asset. If the additional flexibility appeals, then a corporate trustee may be more appropriate for you.