SMSF Trustee structure: Individual or corporate?
SMSF holders need to decide whether a corporate trustee or individual trustee structure is in their best interests.
A self managed super fund (SMSF) is a type of trust and needs to appoint at least one trustee that's responsible for managing its assets. The trustee makes decisions for the fund and trustee duties include ensuring the SMSF complies with the relevant superannuation legislation. On the other hand, there's a board of trustees who take care of these tasks for all fund members of retail or industry super funds.
You'll be asked to choose an SMSF trustee structure during the setup process. The decision can affect how you administer your fund, the specific rules you need to abide by and the overall costs. While it's possible to change the SMSF trustee structure at a later date, this will require additional time and costs from the members.
What SMSF trustee options can you choose?
In short there are two options for SMSF trustee structures - individual and corporate. The individual version must have at least two people who act as the trustees. All members of the SMSF must also be the trustees. A corporate trustee sees a company take on the role of trustee for the SMSF and the members are directors of that company.
To become an SMSF trustee you must be at least 18 years old, not under a legal disability (such as mental incapacity) or a disqualified person as specified by the ATO. In both cases, one member or director can't be employed by another, unless they are related.
Trustees are supposed to monitor whether SMSF runs in accordance with its trust deed. A trust deed is a legal document that sets out the rules for establishing and operating your fund. It includes information about the trustee structure and should be updated if anything changes.
How does an individual trustee structure work?
In this situation the SMSF's assets are registered in the names of all the individual trustees on behalf of the fund and ownership is through trust for the members of the SMSF. Usually every member is both a trustee and member of the fund.
Even for single member individual trustee SMSFs two people must be trustees, but only one of them has to be a fund member. These SMSFs can have between multiple members, which are usually limited between two and six individuals depending on state and territory laws.
Every trustee is equally responsible for managing the SMSF and making decisions, even if they don't play an active role in the process. They can employ professionals to help, but the full consequences of any actions ultimately lie with the trustees.
How does a corporate trustee structure work?
A company is set up to act as the legal trustee, instead of any individual person, and the SMSF's assets are registered in the name of this company. In this scenario all members are required to be directors of the company responsible for all aspects of the fund’s operation.
Single member corporate trustee SMSFs need at least one fund member to be the sole director, but can have a maximum of two directors. Legislation allows between one and six directors depending on the number of SMSF members in the fund.
Each should apply for an ID known as a director identification number before setting up SMSF. The penalties for any breaches of superannuation legislation are imposed on the company and not each director of the company.
What is the difference between individual vs corporate trustee?
Individual Trustee | Corporate Trustee |
Has 2 to 4 members | Has 1 to 6 members, who must also be directors |
At least 2 trustees are required, one of which must be a member | At least one director is required |
No ASIC fees for establishment. | ASIC charges a registration fee. (This cost is included in the first annual fee by Stake.) |
Penalties for each trustee if super laws are breached. | Penalty applies to corporate trustee |
Need to change ownership titles of SMSF’s assets if an individual trustee changes. Financial charges may apply. | SMSF titles remain the same, just notify ASIC of any changes of director. |
Appropriate succession plan needed to operate as usual in the event of trustee’s death. | Continues in the event of a member’s death. |
What is the current split of individual and corporate self managed super funds?
At the end of FY22 around two thirds of SMSFs had corporate trustees and the remaining third were individual structures according to the ATO’s data. However, corporate trustees have proven to be much more popular in recent years with their proportion growing from 81.0% of new SMSF registrations in 2017-18 to 85.8% in 2021-22.
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What are the benefits of an individual trustee structure?
The individual trustee structure is comparatively cheaper to set up and could have lower running costs depending on your investment choices. Establishing a company comes with extra costs and efforts from the SMSF owners. There are annual fees and reporting obligations from ASIC.
It also doesn't need to abide by the additional regulations that apply to companies. For example having more flexible requirements for holding trustee meetings and no need to comply with a company constitution.
What disadvantages does an individual trustee have?
As every individual is listed as a trustee, the legal title on the SMSF’s investments must be updated each time there's a change amongst members of the fund. This involves dedicating time to complete the administration and financial costs for the updates. State government authorities and financial institutions generally charge fees for title changes.
Always needing at least two individual trustees can lead to problems at times, especially related to succession planning. The SMSF might not continue to operate as usual if there are no considerations of what to do when a member dies or gets a legal disability.
There's a risk that an individual's personal assets could become mixed up with those in the SMSF. The assets could be considered in legal challenges as the people are ultimately responsible for the fund's actions.
It also means that the SMSF cannot pay for an administrative penalty and the fines would apply to each member. An SMSF with four trustees would pay four times the amount of a corporate trustee, where the company is the only one that could be charged for a corporate trustee.
The SMSF could face restrictions related to certain investments. For example property is bought through a limited recourse borrowing arrangement and is held in a separate property trust outside the actual SMSF structure. Many SMSF providers don't provide this option for individual trustees.
A member of an individual trustee SMSFs must complete additional paperwork to evidence a lump sum payment is needed. There’s a risk it could conflict with regulations because the primary purpose of the SMSF should be paying pensions and not lump sums.
What are the benefits of a corporate trustee structure?
Removing or adding a director can be relatively simple and cost effective as the legal ownership of assets does not change. It's also the only way to manage an SMSF by yourself, as the sole director of the trustee company and can make succession planning arrangements easier.
Establishing a special purpose company, whose primary purpose is to be the corporate trustee can reduce costs and the administrative burden. It means you don't have to lodge an additional tax return for the company, it will be assessed as part of the SMSF one.
Directors could also share the costs of penalties received by the SMSF and keep their personal assets separate. Litigation is generally limited to the assets held in the name of the corporate trustee and doesn't extend to the directors themselves.
There can be greater flexibility around payments, as corporate trustees can provide benefits to the trustee of the SMSF as either pensions or as lump sums without additional paperwork.
What disadvantages does a corporate trustee have?
Corporate trustees have a higher upfront establishment cost compared to individual trustees. There are fees setting up a company and most SMSF providers charge extra due to the additional administration work required.
It also needs to pay an annual ASIC Special Purpose Company maintenance fee and lodge annual returns if not a special purpose company. The trustee is bound by corporation legislation as well as regulations for SMSF. If the company is used outside of the SMSF and runs into trouble, it can be tough to prove which assets belong.
Do SMSF members need to be trustees?
For individual trustees each member of the fund must be a trustee and vice versa. For single member funds only one of the two trustees needs to be a fund member. Corporate trustee set ups require every member of the fund to be a director and for directors to be fund members.
What happens when an SMSF trustee dies?
Details on how to deal with this situation should be included in the SMSF's trust deed as part of how the fund operates. The SMSF generally pays a death benefit as lump sum or income stream to a dependant or other beneficiary of the deceased. However, this can only be distributed if the SMSF remains compliant.
Individual trustee SMSFs need to have at least two people acting as trustees. Further actions are required in order to keep within regulations if there's only one person left. They could appoint one or more additional trustees. Trust deed may appoint the deceased member’s legal personal representative as trustee, but this is not an automatic change.
On the other hand they could restructure the SMSF to a corporate trustee structure where the surviving member acts as the sole director of the corporate trustee. In both cases there's administrative work to amend the trustee situation, a need to notify ASIC of changes to directors and then submit changed details to ATO.
For the corporate trustee structure, the surviving member can be the sole director of the company acting as the corporate trustee. A new director should be appointed if there is no longer anyone running the company.
Assets such as bank accounts and investment platform accounts can be frozen when one of the individual owners dies without a clear succession plan.
Megan is a markets analyst at Stake, with 7 years of experience in the world of investing and a Master’s degree in Business and Economics from The University of Sydney Business School. Megan has extensive knowledge of the UK markets, working as an analyst at ARCH Emerging Markets - a UK investment advisory platform focused on private equity. Previously she also worked as an analyst at Australian robo advisor Stockspot, where she researched ASX listed equities and helped construct the company's portfolios.
