Corporate or Individual Trustee – what to consider for your SMSF

A self-managed superannuation fund (SMSF) is a simply a trust structure, with favourable taxation concessions. Any trust structure must have trustee, and this can be either an individual, or a company (corporate). The choice between a corporate trustee and individual trustee is an important decision and should take into consideration several factors that are discussed below.

1. Limited Liability: A key advantage of having a corporate trustee is limited liability. Investors are generally risk averse and ideally wish to keep their accumulated retirement savings as far away from potential creditors as possible. The incidence of frivolous and vexatious claims is increasing and having a way to clearly separate assets from your personal ownership (which is what an Individual Trustee would be) is a major vote in favour of a corporate trustee. If legal proceedings do arise, the liability is generally limited to the assets of the corporate trustee.

In conclusion, a corporate trustee affords more asset protection and allows an easier separation of asset ownership than an individual trustee.

2. Ease of Administration and Costs: Our lives are dynamic, and changes are often required as our circumstances change (due to death, divorce, bankruptcy). This generally requires a change in legal ownership of the SMSF assets, which can be costly and time-consuming for an Individual trustee. The corporate trustee doesn’t change, so titles of the SMSF assets are unchanged. Most institutions charge a fee for title changes. When a person starts or stops being a member of a SMSF where there is a corporate trustee, a change in directorship is required. This can be done via the Regulator’s (ASIC) portal. It is important to note that there are penalties levied for failing to notify ASIC within specified time periods of any change. Otherwise, there is no fee involved with a change of Directorship. The company would need to record a minute and approve a resolution for any change, but this should be able to be done with far less cost and can be carried out with templates readily available in the public domain. There are no fees to be paid to ASIC for an Individual trustee, but an annual levy is required to be paid for a corporate trustee. Further, directors need to apply for a director ID, which is free, but may be time consuming.

The government recently confirmed in its 2023/24 Mid-year Economic and Fiscal Outlook (MYEFO) on
13 December 2023 that the Commonwealth penalty unit will increase to $330. As a result, most administrative penalties will result in a penalty of up to $19,800. Penalty units can be applied by the ATO under s166 of the Superannuation Industry (Supervision) Act 1993 for many reasons including:

• s65(1): lending to members or relatives (with exceptions): 60 penalty units
• s67(1): borrowing (with exceptions):60 penalty units
• s84(1): failing to comply with in-house asset rules: 60 penalty units
• s103(1): failing to keep minutes: 10 penalty units
• s104(1): failing to keep records of changes to trustee: 10 penalty units

Any penalties levied by ASIC are levied on each trustee, so if the SMSF has individual trustees, each trustee is fined. This contrasts with a corporate trustee, where there is one trustee.

In conclusion, ongoing costs can be higher with a corporate trustee, unless there are changes in circumstances. This is when an individual trustee structure will be far more costly and time consuming.

3. Succession Planning: A corporate trustee structure continues in the event of a member’s death. This means that there is more certainty about the control of the SMSF and its assets under a corporate structure. In contrast, for a SMSF with an individual trustee, it is unlikely to be able to continue to operate as usual, unless and appropriate succession plan has been prepared. This can cause stress and anxiety when members may already be emotional from the loss of a loved one.

Succession is a derivation of ease of administration and therefore, a corporate structure provides far more certainty of the SMSF continuing to operate as usual.

4. Borrowing for investments: If a SMSF intends to borrow money for investments, some lenders may prefer or require a corporate trustee structure. This may limit investment opportunities for an individual trustee structure.
5. Member and Trustee requirements: Both trustee structures allow 2 to 6 members, but some state and territory laws restrict the number of trustees a trust can have, to less than 6. Each member of a Corporate trustee SMSF must be a Director, and there are no restrictions on having 6 Directors of a company.

All members must be Directors, but not all Directors have to be members of the corporate entity. If there is only one member, they can be the sole director. However, there must be two Trustees when an individual structure is selected. In both cases, if the fund member is an employee of the other trustee/director, the fund member and other trustee/director must be a relative.

You will need to seek professional advice to help you understand if your state or territory restricts the number of trustees if you wish to have an individual structure.

We have assisted clients over the years to migrate from individual to corporate trustee structures. This has generally been triggered by the death of either a member in question, or someone a client has known is going through the administration nightmare that can evolve when dealing with government agencies and financial institutions. It is a cumbersome, time consuming and often costly exercise to change. Therefore, we hope that the above synopsis assists you to make an informed decision, based on your own individual circumstances.