Should your SMSF have a corporate trustee or individual trustee?

Should your SMSF have a corporate trustee or individual trustee?

We are often asked whether it is better for a SMSF to have individual trustees or a corporate trustee. The major disadvantage of a corporate trustee is the up-front cost of establishing the company. However there may be long term benefits of having a company which will outweigh the costs.

Benefits of Having Individual Trustee’s

If individuals are to act as trustee’s of a SMSF they can simply be appointed as part of the normal super fund establishment process without additional costs being incurred. Incorporating a company to act as trustee incurs an additional up front cost to register the company. Insight Super charges a fee of $1050 (including GST) to incorporate your trustee company.

On an annual basis a trustee company must also pay a fee to ASIC for the company annual review (this fee is generally $263 but can be reduced to $53 if the company acts solely in the capacity of trustee of a super fund). The company must also prepare annual return documents. Insight Super’s cost for preparing the company annual return and minutes is $110.

Benefits of a Corporate Trustee

The very nature of a family SMSF means that members and trustees may come and go from the fund. Parents may introduce adult children as members until such a time as the child has enough superannuation or their own family to commence their own SMSF. Members of an SMSF may pass away requiring them to exit the SMSF as members and trustees. An executor may also need to be appointed as a trustee for a short period of time from the death of the fund member until the death benefits exit the fund.

Changes in trustees and members can be a costly exercise as when the trustee’s change it is necessary to prepare a deed of appointment and retirement to officially retire the outgoing and appoint the incoming trustees. The trustees must also notify all relevant share registries and banks of a change in trustee to reflect the new ownership in assets on behalf of the fund which can be a time consuming process. In contrast, where a new member joins a fund with a corporate trustee it simply requires the appointment of that member as a Director of the Trustee Company. Where a member leaves the fund it is simply necessary for them to resign as director.

Reduced trustee litigation exposure

Where the trustee of a fund is subject to litigation – such as a personal liability action in relation to one of the fund’s properties, then the trustees may potentially be personally liable for the costs if they are unable to be recovered from the assets of the fund. Whilst this type of action is uncommon, having a corporate trustee will provide additional protection by limiting liability to the assets of the company not those of the underlying directors.

Single Member Funds

Single member funds with a corporate trustee allow the sole member to be the only director of the company and have full control over the running of the fund. If the fund had individual trustees it would be necessary for another individual to act as the second trustee and assist in the running of the fund.

Borrowing in Super Funds

Often if a SMSF wishes to borrow the lender will insist that the SMSF has a corporate trustee.  More information on borrowing from your super fund.

Greater flexibility to make lump sum payments

The definition of a regulated fund in section 19 of the SIS Act states that a regulated fund is:

  • A fund that has a constitutional corporation acting as trustee pursuant to a role in the trust deed of the fund: or 
  • A fund that has individual persons acting as trustees where rules of the fund require that the sole or primary purpose of the fund must be to pay old age pensions.

This small glitch in the superannuation legislation is a controversial issue. However should the tax office interpret this section based on its literal wording it may indicate that if a member would like to take their benefits as a lump sum the trustee of the fund needs to be a company. Having a company may allow greater future flexibility for the members to take a lump sum without the need to start a pension first and then commute that pension to a lump sum.

Reduced Penalties

If super laws are breached the ATO levies administrative penalties on each trustee per contravention.  If the fund has a corporate trustee and the trustee is charged a penalty, it is only charged one penalty amount.  The directors of the corporate trustee are jointly and severally liable to pay that penalty.  However where a fund has individual trustees the penalties would be imposed on each individual trustee - for an SMSF with four members and trustees this can lead to a penalty which is four times the penalty imposed on a corporate trustee for the same superannuation law contravention.

Can I use my existing company as my SMSF Trustee?

Technically yes you could.  However just because you can, it doesn't mean it is a good idea to do so.  Using a company for multiple purposes is fraught with risk.

Why should you have a separate company?

Because of the stringent regulation requirements around self managed super funds there cannot be any overlap between SMSF funds and other company funds.  

In some situations if your company gets into financial difficulty or is subject to litigation through its other trading activities your SMSF assets could be at risk.  If the company is sued in its capacity as SMSF trustee (e.g. a tradesperson working on a SMSF rental property has an accident) then other company owned assets may be at risk.  There are also potential issues associated with identifying the owner of the assets and with registering charges over your company.  For the cost of registering a new company it is not worth the risk of endangering your complying SMSF status.

If you are setting up a new company to act as trustee you can register it as a special purpose SMSF company.  A special purpose SMSF company is one that only acts as trustee of a SMSF. This gives you a reduced annual ASIC fee for the company.

If you require any assistance in determining the appropriate trustee structure for your SMSF just the button below to get started.

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