SMSF Structure: Individual vs Corporate Structure
By Kimberlee Brown, SMSF Director, H&R Block SMSF Solutions
When establishing a self managed super fund (SMSF), you are able to elect a company or individual to act as the trustee of the fund. Often electing individual trustees is more popular, with the ATO's statistical reports indicating that approximately 77% of all SMSF are structured in this way.
Reports also show that in 2016, 93% of all new SMSF registrations were done so with individual trustees. These numbers are concerning, given the extensive benefits that running a corporate trustee presents.
It seems most people are drawn to establishing an individual trustee structure simply because of the cheaper initial cost. While the establishment fee for a corporate trustee structure is higher due to the need to establish and register the company with ASIC, it can be expected to deliver considerable monetary savings over the longer term. In this article, we will take a look at some of the significant advantages of running a corporate trustee as opposed to running an SMSF with individual trustees.
Advantage of a corporate trustee structure for sole members
If you are looking to establish an SMSF as a sole member, a corporate trustee structure allows you to be the sole director of the trustee company. The laws governing SMSFs stipulate that with individual trustees, a sole member must have another person come on-board to act as the second trustee. If for example, there is a SMSF with a single member fund with two individual trustees and one dies, the fund cannot remain an SMSF with only one trustee and one member. In this case, someone new will need to be appointed as the second trustee and this can be an unnecessary burden and create potential for conflict.
Succession and estate planning
The control of an SMSF and its assets is of paramount concern, however depending on who is elected as trustee, this can become complicated in the event of the death or incapacity of a fund member. Electing a company as trustee enables greater protection to the fund as companies are considered to have an infinite lifespan ie the fund continues in the event of a member's death.
With individual trustees however, the trustee relationship ceases upon death and timely action is required in order to ensure the aforementioned trustee/member rules are adhered to. The later 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. A company offers greater flexibly for estate planning and avoids extra administrative work and costs at a difficult time.
Admission/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, so too must the records pertaining to every asset held by the fund. 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, the trustee itself remains the same. The title to all assets remains unchanged, removing any additional administration burdens.
Asset separation and protection
As per SMSF regulations, 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 sole purpose corporate trustee is able to better prevent this contravention due the separation of entities concept. The company is considered a separate entity to the fund owners, meaning that the corporate trustee will have no personal money, only SMSF money.
For example, if an SMSF trustee is sued and a large debt results, individual trustees have their personal assets at stake if the SMSF assets are insufficient. In contrast, a corporate trustee is a separate legal entity, offering better protection.
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. Individual trustees are liable to one penalty each. Consequently, having a corporate trustee instead of individuals can mean fewer 'heads on the chopping block' for penalties. If superannuation laws are breached, administrative penalties are levied on each trustee, whereas this typically only applies to a company once for each contravention. For example, for failing to prepare financial accounts and statements, each trustee would be liable for a $1,800 penalty which would amount to $7,200 if there were four trustees (four times the amount a fund with a corporate trustee would incur).
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.
Lump sums and pensions
Individual trustees are regulated under the pensions power within Australia's Constitution, while a corporate trustee is subject to the Corporations Act 2001. The main implication of this distinction is that an SMSF with a corporate trustee can pay benefits as a lump sum or as an income stream. A SMSF with individual trustees must state in its trust deed that the fund is established for the sole or primary purpose of providing old-age pensions (which are private retirement income streams rather than the government-supplied age pension). A fund with individual trustees can still pay benefits as a lump sum, however, the deed must have a specific clause allowing such payments.
Limited recourse borrowing arrangements
When trying to engage in a limited resource borrowing arrangement, banks will usually only establish such with a corporate trustee. When an SMSF, with individual trustees, tries to successfully engage in the arrangement, they will often have to establish a company, retire the current trustees and appoint the company. When considering finance often 'time is of the essence', so having to instate a company will most likely lengthen the time it takes to gain approval and create unnecessary burden.
While it is possible that appointing individuals as trustees carries benefit, particularly lesser initial costs, the numerous advantages discussed in this article of having a corporate SMSF trustee should persuade many to make the change, including the potential for greater monetary savings over the long-term. At H&R Block SMSF Solutions, we strongly recommend corporate trustees as the better and more efficient option.
- Talk to an H&R Block SMSF expert today by calling 1300 611 320
- Guide to setting up an SMSF
- Read more about H&R Block SMSF Solutions
- What is a self managed super fund?
- A guide to buying property through an SMSF
This content has been prepared by H&R Block Ltd ("H&R Block"), ABN 89064268 800.The information is general in nature and ds 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, H&R Block, its officers, employees and agents 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.
Updated: May 2017
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