When setting up a self-managed super fund (SMSF), you’ll be given two choices: to either go with an individual trustee structure, or a corporate trustee structure. If you read that and you’re already confused, you might not know what an SMSF trustee is, why it matters, and how the role of trustees can differ between SMSFs.
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What is an SMSF trustee?
An SMSF trustee is essentially in control of the SMSF, making decisions for the fund to make sure it's in compliance with superannuation rules and legislation, as well as the funds' objectives. In an industry or retail super fund, a board of trustees make decisions on behalf of the fund members. However, in an SMSF, all members are trustees. Meaning, as an SMSF trustee, you’re in control of all the investing, and you’re responsible for the fund’s investment strategy.
As mentioned, there are two different types of SMSF structures: you can either have an SMSF with individual trustees, or a corporate trustee (which is essentially a company that acts as a trustee). Depending on the type of SMSF structure you choose, you could have a pretty different-looking fund, so it’s important to understand and recognise the differences before making your final decision.
How an SMSF with individual trustees works
If you go for an SMSF with individual trustees, you can have two to six members of the fund. Each member needs to be a trustee, and each trustee needs to be a member of your fund. The only exception to this rule is with a single member SMSF, wherein there must be two trustees and one trustee must be a member. A member cannot be an employee of another member unless they are related. Plus, there are some state and territory laws that can come into the mix and make things a little more complicated.
In some states and territories, the number of trustees a trust can have is less than six. The number of members allowed in SMSFs was only recently changed from four to six, so some legislation is yet to catch up. If this is an issue, or was to become an issue in the future, an SMSF with a corporate trustee could be the better choice.
When establishing your SMSF with individual trustees, there are no applicable Australian Securities and Investments Commission (ASIC) fees. So, getting off the ground is less expensive, and there are less ongoing administrative requirements. On the topic of payments, trustees can’t be paid for their duties and/or services as the trustee.
Despite costing less to get going, if an individual trustee is removed or added, things can get a bit murky. All the titles of the SMSF’s assets must be changed, which can be both costly and time-consuming. The fund’s assets need to be in the SMSFs name, and they can’t be combined with any personal assets of any members.
If any laws are broken in running your SMSF, administrative penalties are levied on each individual trustee. The value of a penalty unit is $222. Essentially, if something goes wrong, it’s on you.
How an SMSF with a corporate trustee works
An SMSF with a corporate trustee differs in a few notable ways from an individual trustee structure. A corporate trustee fund can have one to six members, and each member must be a director of the corporate trustee. Each director of the corporate trustee must be a member, and a member can’t be employed by another member, unless they are related.
Again, some differences can come into play if it’s a single-member fund. The corporate trustee can have one or two directors, but the fund member must be the sole director or one of the two directors.
Establishing a corporate trustee SMSF works a little differently. There is an ASIC-charged fee to register a corporate trustee for the first time. An annual review fee also applies, which is lower if the corporate trustee is solely a super fund trustee, but higher if it performs another function, too, such as running a business.
Just like an individual trustee SMSF, corporate trustees can’t be paid for their services. Directors can’t be paid for their duties or services as directors, either.
The price of getting started can be worth it if you’re going to be adding or removing any trust members, because the corporate trustee won’t change. Recording and registering assets is, overall, simpler and cost-effective under this structure. When a member comes or goes, they either become or cease being a director of the corporate trustee. Therefore, titles of the SMSF remain the same.
The SMSF assets need to be in the fund’s name and cannot be combined with the director’s personal assets. Because it’s a company, there’s limited legal liability, so there’s greater protection from being sued for any damages.
If laws are broken, administrative penalties are levied on the corporate trustee, rather than individual trustees. The value of penalty units remains the same ($222).
Individual trustees vs. corporate trustee: A comparison
As we’ve discussed, there are some notable differences between an individual trustee structure and a corporate trustee structure. Is one necessarily better than the other? It comes down to you and your own individual circumstances to decide which SMSF structure might best suit your wants and needs.
To get a better idea, let’s compare some of the most notable benefits and drawbacks of each trust type.
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SMSF with individual trustees |
SMSF with corporate trustee |
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Benefits |
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Drawbacks |
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How to appoint trustees or directors
If you’ve made up your mind about which structure to set up your SMSF with, next up is adding trustees or directors to get the ball rolling. But first on the agenda is making sure all new trustees/directors are eligible.
To be a trustee or director of a super fund, a person needs to be over 18 years old. There are two cases in which, even if a person is over 18, this cannot happen: if they also have a legal disability (for example, mental incapacity) or they are a disqualified person.
Before becoming a trustee or director, you must be able to answer ‘no’ to the following questions provided by the Australian Taxation Office (ATO).
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Have you ever been convicted of a dishonest office, in any state, territory, or a foreign country?
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Have you ever been issues with a civil penalty order?
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Are you currently bankrupt or insolvent under administration?
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Have you been previously disqualified by the ATO or APRA?
If a person looking to join your fund answers ‘no’ to any of these questions, they could choose to apply for a waiver of disqualified status, only if the office wasn’t a term of imprisonment for over two years or a fine of more than 120 penalty units.
In addition to meeting eligibility criteria, new trustees or directors need to understand what running an SMSF means. Whether a person is a trustee or director, they become responsible for running the fund and making the fund’s investment decisions. Every person is responsible for the decisions of the fund as a whole, so if one person makes a choice you’re essentially required to roll with it. While you can get outside help from people like financial advisors, accountants, or tax agents, the responsibility is ultimately on you and no one else.
Sealing the deal
If this all sounds dandy and you’re ready to get started, the process of appointing a trustee or director is slightly different for each trust type. However, regardless of the structure, all trustees and directors must 1) consent in writing to becoming a trustee/director and have this agreed upon by all relevant parties, and 2) sign the Trustee declaration which states they understand their roles and responsibilities, which must be done within 21 days of becoming a trustee/director. The ATO must be notified within 28 days of any changes made to your SMSF - this includes new members.
All of these documents must be kept on file for at least 10 years after the SMSF runs its course, and penalties apply if this isn’t complied with.
You can access a copy of the Trustee declaration by going to the ATO’s website.
If you already have an SMSF, and therefore an SMSF trust deed, the question of who can join can get a little more complicated. The trust needs to allow for new members to join, and it will state who can join (for example, relatives, spouse of relatives, children, etc.). If the trust doesn’t allow for members, or for the person you want to add, they won’t be able to become a trustee or director.
If they can join, adding a member to an SMSF is slightly different for each trust type. For adding a member to an SMSF under a corporate trustee, they just need to be added as a director of the trust. Adding individual trustees, on the other hand, involves changing the titles of the trusts' assets (which, as we mentioned, is a bit of a pain).
A final note
Whether you choose to go for an individual trustee or a corporate trustee structure, running an SMSF is no easy feat. There is a lot involved, including risks and responsibilities - from organising the annual audit to accounting to investing - that need to be weighed up before deciding if an SMSF is right for you.
Image by Sebastian Herrmann on Unsplash
Harry O'Sullivan
Denise Raward
Aaron Bell
Rachel Horan
