Self-managed super funds (SMSFs) – Which structure is right for you?
Tax Law - 10 Aug 2021
Are you interested in the world of self-managed super funds (SMSFs)? If the answer is yes, it is important to explore whether you are better off pursuing an individual or a corporate trustee structure. Differences in costs, setup, and protection offered by these two types of SMSFs demonstrate a need to self-assess which structure is most suitable for you!
It is important to first highlight that every member of a SMSF is required to be a trustee or a director of a corporate trustee. An SMSF trustee’s primary responsibility is to ensure the fund abides by legal requirements such as fund auditing and reporting, as well as tax obligations to the ATO. These obligations must be recognised and agreed upon by each trustee in a trustee declaration.
Who owns the SMSF’s assets?
The assets of a SMSF are listed in the trustee’s name on behalf of the fund. This means that in an individual trustee structure, the assets are listed in the name of each trustee. In a corporate trustee structure, a company must be set up as a trustee where the fund members are directors. As such, the SMSF’s assets are listed in the company’s name. Companies are considered a separate legal entity; this is a fundamental concept to acknowledge before jumping further into the aspects of the two fund structures. The legal separation between the company as a trustee and the individual fund members means that corporate trustee structures enjoy certain unique benefits (which we’ll get to further on).
How are the assets separated?
Under both trustee structures, the SMSF’s assets must be kept separate from the personal assets of fund members. This is easier to achieve under a corporate trustee structure, as the assets aren’t registered in the names of the individual fund members, but rather the company.
What are the member and trustee requirements?
All individual trustee structures must have at least two individual trustees. For single-member funds, this means that one trustee will not be a fund member, but this is only allowed where the non-fund member isn’t an employer of the member (unless they are a relative).
Where the trustee company in a corporate trustee structure has a sole director, they are the only member of the SMSF. If the company has two directors, the second director cannot be a member of the fund or their employer (again, unless they are a relative).
SMSFs cannot have more than four members. Therefore, if the SMSF has an individual trustee, the SMSF can have two to four individual trustees, who must also be members of the fund. Similarly, a multiple-member SMSF with a corporate trustee structure allows two to four directors, who are members of the fund.
How do the two structures compare in cost?
An individual trustee structure is certainly cheaper to set up and has lower ongoing costs. This is comparably less expensive than a corporate trustee structure, requiring company registration with ASIC and related registration fees. It also requires an annual review fee. For both trustee structures, the trustees (and the directors) cannot be paid for their services.
What are the effects of membership changes?
Members joining or leaving an SMSF with an individual trustee structure requires the changing of asset ownership documents (remember, the assets are registered in trustee’s names), which can be costly and time-consuming. This is where the separate legal entity principle in a corporate trustee structure comes in handy—with assets being registered in the company’s name, there is no requirement for changes of asset ownership documents. The addition/loss of a member does, however, result in a concurrent addition/loss of the company director (and the ATO and ASIC must be notified).
What are the succession rules?
Funds with an individual trustee structure should have a succession plan in place! Where changes in trustees occur due to death or incapacitation, the fund is otherwise unlikely to continue operating. Corporate trustee SMSFs with more than one member can continue to operate in these circumstances, as a company may run with only one director if the remaining fund members wish to do so.
Do trustee penalties differ between the two structures?
Trustee breaches of superannuation and taxation legislation in an individual trustee structure result in the total penalty amount being levied on each individual trustee. Corporate trustee structures are advantageous here, as any penalties are applied to the company as a whole and shared by the directors.
Which has greater protection?
Trustees are individually liable in an individual trustee structure (as the name of the fund type suggests). On the other hand, corporate trustee structures provide more legal protection for a SMSF member’s assets, as the company is sued rather than the individuals personally.
In terms of asset protection where an SMSF defaults in loan repayments, the lender’s recourse rights are limited to the asset purchased with the loan, under what’s called ‘limited recourse borrowing arrangements’. This applies to both types of trustee structures; however, lenders prefer SMSFs to have a corporate trustee as they have better asset protection.
The Bottom Line
The main benefits of individual trustee structures include their lower costs and less complex setup structure. The advantages of a corporate trustee structure are largely attributable to being a separate legal entity, and therefore having better protection and limited liability. It is also easier to make changes and to keep personal assets separate under this structure. As a result, the majority of SMSFs are set up with corporate trustees.
Do you own a business and wish to structure it in an SMSF?
If so, we provide legal advice for carrying on your business in an SMSF, to ensure that you are compliant with superannuation legislation (and avoid any hefty penalties). Whether this is making sure that your SMSF satisfies the sole purpose test or deciding between an individual/corporate trustee structure (as explored in this blog), get in touch with the ABA legal team today!
If you liked this blog, be sure to check out more of our tax related articles here.
Co-written by Sonia Clements.
The information contained in this blog is general in nature and should not be considered to be legal, tax, accounting, consulting or any other professional advice. In all cases, you should consult with a professional advisor familiar with your factual situation for advice concerning specific matters before making any decisions. By reading this blog, you confirm your understanding of this disclaimer.