We are often asked what is the better option for clients to use as the trustee structure for their self-managed superannuation fund (SMSF) – individual or corporate trustees.
From a legislative viewpoint, there is no preference, but there are practical issues to consider in deciding on a preferred structure.
If we look at recent data from the Australian Taxation Office (ATO), almost 75 per cent of SMSFs have individual trustees instead of a corporate trustee, and approximately 91 per cent of new SMSFs set up in 2012 used individual trustees.
Under the SIS legislation, a SMSF must either have a company act as trustee of the fund or a group of individuals.
A single member fund with individual trustees must therefore appoint a second individual trustee to comply with SIS legislation, with control and responsibility being shared by both trustees.
A corporate trustee can have a sole director, therefore allowing a single member full control over the management of the fund.
For SMSFs with more than one member, each member of the SMSF must also be a trustee, or where the trustee of the SMSF is a company, each member must be a director of the company.
Here are several considerations and potential advantages of each structure:
All assets of the SMSF must be held in the name of the trustees. In the case of individual trustees, this means ALL trustees’ names must be on the title of all assets.
Changes in 2012 mean not doing so could result in a financial penalty for the trustees.
Changes in membership (due to marriage, divorce, death or adding children to the SMSF) would require changes to the names registered on the title of assets when there are individual trustees.
However for corporate trustees, the only change is notification to both the Australian Securities and Investments Commission (ASIC) and the ATO of the change of directors and members as the name on the assets is still the name of the corporate trustee.
Changing the titles for every single asset owned by the SMSF can be a costly and time consuming process.
Practical problems can arise as share registries and broker services may not cater for more than two names or only allow a fixed number of characters on the title of an asset or on an account name, resulting in additional documentation required to verify ownership on behalf of all trustees.
As a corporate trustee company is subject to limited liability, this may provide greater protection of personal assets.
The protection may also fall away if the directors did not fulfil their duties and responsibilities under the Corporations Act.
This may not necessarily provide protection from penalties as under the SIS Act the regulator is able to pursue any person involved in a breach of the applicable legislation.
Borrowing within superannuation
If a SMSF wishes to undertake a Limited Recourse Borrowing Arrangement, most of the major lenders generally insist the SMSF has a corporate trustee. This is not a legislative requirement for the borrowing arrangement.
There is an establishment cost for a new trustee company (which should be an ASIC special purpose company) and a small annual ASIC levy.
These costs need to be considered with those that will occur if an individual trustee structure is used when there is a membership or trustee change.
Member numbers options
The following summary can be drawn depending on the number of members in the SMSF.
Single-member SMSF – cleanest approach may be a single director company so no other parties are involved.
You also need to ensure that there is a Will which will appoint an executor as the new director of the trustee company to handle the SMSF on the member’s death.
Two-member SMSF – either structure will work and the decision will hinge more on whether the members wish to pay a little more for the running of the trustee company and the perceived benefits of that structure.
Three- and -four member SMSF – while legally either trustee structure is suitable, the practical issues make it more likely to lean towards the use of a corporate trustee.
Philip LaGreca is the administration head of technical services at AMP SMSF.
By Philip LaGreca