Self-managed super funds (SMSFs): Why you need a corporate trustee

Alice Allan - Wednesday, June 28, 2017

Self-managed super funds, more commonly known as SMSFs, provide a level of financial control that appeals to many people, particularly as retirement draws closer. But if you have an SMSF, or you are thinking of setting one up, there are several issues you need to know about early, before they become a problem.

Individual vs corporate trustees

SMSFs require trustees to manage them. An SMSF can be set up with either an individual or a corporate trustee structure. Both structures have their advantages and disadvantages.

Why are individual trustees vulnerable?

While the name suggests individual trustee SMSFs would be controlled by just one person, the law actually states that SMSFs set up with an individual trustee structure require at least two trustees to comply. While a single member fund is allowed, this is only possible if there are two individual trustees managing the fund or if a corporate trustee is appointed.

That’s no problem if say, you and your partner want to set up an SMSF. You both become individual trustees and members of the fund. However, the role of a trustee of an SMSF is onerous and non-compliance can be costly. For example, if the fund breaches the borrowing provisions, the trustees may be served with an administrative penalty $12,600. However, both trustees would be liable to pay this penalty – a total of $25,200. Would you be able to find someone (even another family member) who would take on the role of trustee knowing they would not be absolved of responsibilities in the event of a breach? On the other hand, if the fund has a corporate trustee structure the penalty only applies to corporate trustee (a total of $12,600). The directors of the corporate trustee can share this penalty.

In addition, as a single member of your own fund, we assume you would wish to make decisions that affect your retirement benefits on your own. If you have an individual trustee structure with two individual trustees but you are the only member, would you want to share the decision making about your retirement nest egg with another party?

Why are corporate trustees safer?

Having a corporate trustee may cost a bit more to set up and there are costs to lodge an annual return, but these days with online company establishment, the costs are very reasonable. In the long run they can save you a lot of time and effort, particularly with administration tasks.

For example, if your fund has individual trustees, the investments of the fund are owned in the name of the individual trustees. Let’s say John and Mary Allan were trustees of the Allan Family Super Fund. If there was a change in individual trustees  one of the current trustees passed away, or a new member joined  the ownership of all of the investments of the fund would need to be updated. This would require a lot of administrative work, particularly if the fund held shares or investments directly.

On the other hand, if the fund has a corporate trustee, the investments are held in the name of the company. Let’s say Allan & Co Pty Ltd was trustee for the Allan Family Super Fund. The directors of the company may come and go, but there would be no need to amend the ownership of any investments.

In addition, if there were two members and one passed away, it would be fine to have only one director of a corporate trustee. So it would not be necessary to appoint another director (who may not become a member of the fund) in order to continue to manage the fund compliantly.

When to seek expert advice

If you’re managing your own super fund, or you’re aware that your parents have an SMSF, you may not know for certain whether it was set up under an individual or corporate structure. You may even be unaware of who the other appointed trustees are. These issues can be difficult to contemplate and discuss with family members, but starting these conversations early and having clear information about your circumstances could save time and money in the long run.

It’s crucial to get the right advice from an experienced financial planner who can look closely at your situation and help you make the best possible financial decisions before they become urgent. To make a time to discuss your SMSF, get in touch with our team today on (02) 6102 4333.