SMSF Series 2 - Individual Trustee vs Corporate Trustee

When establishing an SMSF, you need to decide whether you establish your SMSF in a company or individual trustee structure. As per the statistics provided by the ATO, approximately 66% of SMSFs had a corporate trustee. This popularity is due to considerable monetary and administrative savings that a corporate trustee structure can bring over the longer term, in spite of its higher set-up and running costs.

At GOOD PEOPLE Chartered Accountants, we also recommend corporate trustees as the better and more efficient option.  

Let's have a look at the advantages that a corporate trustee can bring in more details below.

Sole Member SMSFs

If you are looking to establish an SMSF as a sole member, at least 2 individuals (i.e. sole member and a relative) are required to be appointed as trustees of SMSF. This can create unnecessary administrative burden and conflict. As an alternative, a corporate trustee can be appointed with a sole director and this structure can provide more flexibility.

Asset Ownership

Admission or cessation of a fund member requires that same person to cease being an individual trustee. The assets of the fund must be held in the name of the trustee(s). If the trustee changes, the records pertaining to every asset held by the fund must also be changed. For example, bank account names must be changed and every shareholding must be updated.

Similarly, if the fund owns property, the land title must be amended. The title to all assets must be transferred to the new trustee(s). This results in significant additional paperwork. Additionally, title changes relating to SMSF assets may incur additional costs through both the state government authorities and individual financial institutions.

With a corporate trustee, changes in membership will result in changes in the trustee company's directorship only and the corporate trustee itself remains the same. The title to all assets remains unchanged, removing any additional administrative burdens.

Asset Separation and Protection

As per SMSF regulations, SMSF fund assets must be recorded and kept separately from any assets which the members hold personally. With individual trustees, there is a higher risk of confusing fund assets with personal assets. A corporate trustee (solely established for your SMSF) is able to prevent this contravention as a result of the separation of entities concept. The company is considered a separate legal entity to the SMSF members, and therefore the SMSF assets held by the corporate trustee are separated from SMSF members.

From asset protection perspective, if an SMSF trustee is sued due to a large debt for example, individual trustees have their personal assets at risk if the SMSF assets are insufficient. In contrast, a corporate trustee as a separate legal entity offers better asset protection.

Succession and Estate Planning

With individual trustees, the trustee relationship ceases upon death of the trustee and timely action is required in order to ensure the abovementioned trustee/member rules are adhered to. The individual trustee structure can still work of course, however an appropriate succession plan must have been put in place to mitigate any contingencies. This is on top of the considerable paperwork that is usually associated with administering a person's estate and obtaining probate of their will.

However, a corporate trustee offers greater flexibly for estate planning and avoids extra administrative work and costs at a difficult time. A corporate trustee is considered to have an infinite lifespan and as a result, the SMSF continues in the event of a member's death.

Administrative Penalties

The SMSF administrative penalties rules allow the ATO to impose administrative penalties on SMSF trustees for the contravention of certain superannuation rules. Directors of corporate trustees are jointly and exclusively liable to the penalty whereas, individual trustees are liable to one penalty each. That is, if superannuation laws are breached, administrative penalties are levied on each individual trustee, whereas the penalties typically only apply to a corporate trustee once for each contravention. For example, for failing to prepare financial accounts and statements, each trustee would be liable for a $3,130 penalty which would amount to $18,780 if there were 6 individual trustees (6 times the amount a fund with a corporate trustee would incur).

Overseas Members

It is easier to provide evidence that the central management and control ('CMC') of a corporate trustee remains in Australia. An SMSF with individual trustees would generally have greater difficulty showing its CMC remained in Australia, hence there is extra risk if members reside overseas or plan to in the future.

Limited Recourse Borrowing Arrangements ('LRBA')

When an SMSF trying to obtain a bank loan for purchasing a property, a bank loan must be done using a LRBA (please refer to the link for further details). LRBA involves establishing a separate property trust to hold the purchased investment property on behalf of the SMSF and banks require LRBA is established under a corporate trustee structure.

If you have further questions, please contact us (https://www.goodpca.com.au/contact-us).

Disclaimer

This content is intended as a general guide for GOOD PEOPLE ACCOUNTING SERVICES clients. The information is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice. Although every effort has been made to verify the accuracy of the information contained above, GOOD PEOPLE ACCOUNTING SERVICES disclaim all liability (except for any liability which by law cannot be excluded), for any error, inaccuracy in, or omission from the information contained on this website or any loss or damage suffered by any person directly or indirectly through relying on this information.