A self managed super fund (SMSF) is a special type of trust created and managed in accordance with superannuation legislation. It therefore requires an SMSF trustee to control and make decisions for the fund and ensure it complies with the super rules. In a retail fund, a board of trustees makes the decisions for all fund members, but in a self managed super fund, each member is also a trustee, or a director of the SMSF trustee company.
When considering setting up an SMSF you’ll need to decide whether to have an individual or corporate trustee structure. And the structure you choose can have several lasting implications for how you administer your fund, the rules you need to abide by, and costs (among other things). So, it’s important to understand what you’re getting into, and consider each structure carefully, prior to establishing your fund.
Make the right choice, understand the differences
When you first set up your SMSF, you’ll be asked to choose between establishing your SMSF by using an individual or corporate SMSF trustee structure. With an individual structure, each member acts as the trustee, but with a corporate structure, a company acts as the trustee and the members are directors. While an individual SMSF trustee may sound more straightforward than a corporate SMSF trustee initially, it may not necessarily be the most efficient option for you in the long-term.
How an individual SMSF trustee works
An individual trustee SMSF structure has:
- trustees who are individual people (as the name suggests)
- each trustee is a member (exception may apply for single member funds)
- at least two trustees, with a maximum of four
- no more than four members who must also be trustees and cannot be employees of another member of the fund, unless they are related
- assets registered in the name of the individual trustees and owned in trust for the members of the SMSF.
Some of the benefits of an individual trustee structure include:
- it’s cheaper to set up than a corporate structure and may be cheaper to run – you don’t need to set up a company and there are no ASIC fees
- because it’s not a company, you don’t need to abide by additional regulations that companies are bound by.
On the other hand, an individual SMSF trustee structure also has some disadvantages, such as:
- always having to have two trustees, which can be problematic for succession planning (e.g. where there are two members and one leaves or passes away)
- it may be cumbersome to add or remove members and change the ownership of your assets
- having trustees as legal owner of assets can easily lead to SMSF and personal assets inadvertently being mixed
- Declarations of trust may be required for certain asset types, such as property
- Australian Tax Office (ATO) administrative penalties apply to each individual trustee. This can result in penalties of up to four times that of a corporate trustee.
How a corporate SMSF trustee works
A corporate trustee SMSF structure has:
- a company that is set up to act as the legal trustee
- no more than four directors in the company
- no more than four members who must also be directors of the company and cannot be paid or employees of another member of the fund, unless they are related
- assets registered in the name of the company.
The benefits of a corporate SMSF trustee structure include:
- it can be easy and more cost effective to add or remove members
- legal ownership of assets does not change when a director/member is added or removed
- it’s the only option if you want to manage your SMSF by yourself
- there may be fewer problems for succession planning where you have two members and one passes away, as the remaining member can stay as the sole director of the trustee company
- Australian Tax Office (ATO) administrative penalties apply to the corporate trustee, not each individual director.
Alternatively, SMSF corporate trustees also have some disadvantages, including:
- additional expenses – because you’re setting up a company, there are more establishment and running costs involved (unless you set up a special purpose company whose only purpose is to act as your corporate trustee; in this case, the running costs can be reduced, and you don’t have to lodge an additional tax return for the company, only for your SMSF)
- your SMSF is also bound by corporation legislation.
Weighing up the different SMSF trustee structures
An SMSF can provide you with more choice and control when it comes to managing your own retirement wealth. However, you need to ensure that your SMSF trustee structure complements your overall financial goals, and this isn’t always easy to work out on your own.
Before proceeding with your decision, we recommend you discuss these questions, among others, with your family and adviser:
- Are you aware of all the associated costs and regulatory implications for each SMSF trustee structure?
- What assets do you wish to invest in (e.g. property or shares)? Some structures are better suited to different types of investing.
- What would happen if one of the trustees were to leave the fund or pass away?
- Will you have other assets outside of your SMSF? And what protections do you have in place to protect these in case a claim is made against your fund? In an individual structure your assets outside of your fund are not protected from liability claims.
This is not an exhaustive list of considerations, but merely a sample of some of the things you will need to consider as there are too many to cover here. Therefore, it’s important to seek advice before proceeding with your decision.
How we can help with your SMSF
At E&P, our SMSF Accounting team support trustees of SMSFs with preparing financial statements and tax returns, coordinating the annual audit and actuarial certificates, commencing and maintaining pension accounts and liaising with the ATO and ASIC.
If you’re open to discussing your options with an SMSF expert, contact us to speak with one of our SMSF specialists.