How to decide which SMSF structure is right for your SMSF
If you have made the decision to set up your own self-managed super fund, one of the first issues you will need to consider is whether your SMSF will have a corporate or individual trustee structure. This choice of structure is important since it will affect how your SMSF is administered and managed.
There are a variety of factors to consider when selecting a trustee structure. An individual trustee structure is generally cheaper to establish and simpler to maintain than a corporate alternative, but offers less flexibility and greater exposure to liabilities. Ultimately your choice of structure should reflect your needs and objectives as well as those of any other members of your SMSF fund.
A Quick Primer on Trustees
The trustee of your SMSF is basically the entity which is legally responsible for the management of your SMSF’s assets and for ensuring your fund complies with all relevant laws. Every SMSF must appoint a trustee. That trustee can either be a company (i.e. a so-called “corporate trustee”) or a group of individuals.
If you choose a corporate trustee structure, then you will (typically) establish a special purpose company as part of your SMSF setup. That company will be the registered owner of all the assets of your SMSF and will hold and manage those assets on behalf of all members of your SMSF. By law, all members of your SMSF will need to be directors of the trustee company.
If you choose the individual trustee alternative, then all members of your fund will become trustees of the SMSF in their personal capacity. The assets of your SMSF will be registered in the name of all the trustees but held on trust (i.e. for the benefit) of all members of your fund. If you are the only member of your fund, then you will be required to appoint a second person to act alongside you. That person generally cannot be your employer or be paid for their services.
Benefits of Individual Trustee Structures
Over the past 5 years, over 91% of new SMSFs have been established using individual trustee structures. This overwhelming popularity most likely reflects the cost advantages and simplicity of an individual trustee structure.
• Lower Cost – Where individuals act as SMSF trustees, it is not necessary to incur the additional costs of establishing and running a company. Registering a company involves a range of mandatory ASIC fees (currently $469 on establishment and $45-$243 per annum for annual review) and entail additional documentation (such as a company constitution). Most SMSF administration companies also charge higher fees to help manage the more complicated nature of SMSFs with corporate trustee.
• Simplicity – Individual trustee structures are generally simpler to manage since members are not required to understand and adhere to the various corporate law requirements which come with running a company.
Corporate Trustee Advantages
While a corporate trustee may be more expensive and complicated to establish and maintain, it does offer various advantages:
• Less hassle if circumstances change – If there is a change in your SMSF membership (for example, a member joins or leaves the fund because of marriage, divorce or death), it is easier to deal with these changes under a corporate structure. This is because the title to all SMSF assets would remain in the company’s name and only the composition of trustee directors would need to be updated. In contrast, when a member leaves an SMSF with an individual trustee structure, then the title to all assets will have to be amended to reflect the new composition of trustees. This can involve significant administrative burden and cost since the ownership records of every asset in the SMSF will need to be updated with the relevant registries and authorities. Where the change is the result of death of a member, this requirement burden would fall at an already challenging time for the surviving member(s).
• Reduced liability exposure – As a director of a corporate trustee, an individual’s personal liability is generally limited to the assets held within the SMSF (not those of the underlying directors). On the other hand, if an individual trustee is subject to litigation, then the personal assets of the trustee could be subject to those liability claims (if they are unable to be recovered from the assets of the SMSF). Individual trustees are also jointly and severally liable for their actions. This means that you (as an individual trustee) may be held personally responsible for any losses resulting from the misconduct of another trustee.
• Borrowing – SMSF’s seeking to borrow funds to purchase assets will typically find that banks and other financiers require a corporate trustee arrangement
• Sole member benefits – An SMSF with a corporate trustee is able to operate with one individual as both the sole member and director, allowing that individual full control over the management of the fund. If the fund had individual trustees, the sole member would be required to find another individual to act as the second trustee and assist in managing the SMSF.
Determining the right trustee structure for your SMSF is an important decision and your election needs to match the requirements of the members of your SMSF. If your affairs are relatively simple and you don’t envisage any changes to the composition of your SMSF membership, then an individual trustee structure may align well with your objectives. On the other hand, if you expect a change of members in the future, wish to reduce your personal liability exposure, are considering borrowing through your SMSF or wish to have a sole member fund, then the benefits of a corporate trustee approach would be worth considering.