Individual or corporate SMSF trustee structure: A guide

Setting up a Self-Managed Superannuation Fund (SMSF) means making many seemingly small but often impactful choices, one of which is its trustee structure. 

The rules governing superannuation funds require an SMSF to have trustees. Trustees are the people responsible for controlling the fund and ensuring it complies with super law.

There are two basic ways SMSF trustees can be structured: as individuals or corporations. Both structures differ in terms of administration rules, costs, and other factors.

Corporate trustee vs individual trustee: How do they differ?

The difference between an individual trustee structure or a corporate trustee is simpler than it sounds.

Under an individual structure, each SMSF member can act as a trustee for the fund. The fund can have between two and six trustees and ownership of its assets will be shared across each of the trustees.

Under a corporate structure, a company acts as an SMSF's trustee while between one and six members can serve as directors of the company. The SMSF's assets are registered in the name of the company.

Here's a breakdown of the key differences:

	Individual trustees	Corporate trustee
Number of trustees/directors	Between two and six	Can be one (sole director) or up to six
Setup cost	Cheaper to establish	Higher upfront costs (ASIC registration)
Ongoing costs	Low	Higher (ASIC annual fees), but can be reduced with a special purpose company
Compliance	Fewer regulatory requirements	Must abide by Corporations Act
Changing members	More complex (asset ownership must be updated)	Easier, assets remain under company name
Succession planning	Can be complicated if a trustee dies	Simpler as company continues with remaining directors
Penalties	Each trustee fined individually by ATO	Treated as one entity, usually one penalty per breach
SMSF loans (LRBAs)	Many lenders restrict	Generally preferred by lenders
Protection	Trustees may face personal losses if sued	More protection, company structure absorbs liability

It's also worth noting that SMSF trustees or directors must not be employed by other members of the SMSF unless they are direct relatives.

Additionally, an SMSF must abide by its constitution. Some SMSFs operating under a corporate structure have constitutions that stipulate the company acting as trustee must have more than one director. If that's the case and you'd prefer your SMSF trustee has a sole director, you'll likely have to update its constitution.

Is an individual trustee structure cheaper than a corporate one?

Cost is another important factor when it comes to choosing an SMSF trustee structure.

Corporate trustee structures are typically more expensive to set up than an individual trustee structure, given they involve the creation of a company. They might also demand additional costs related to upkeep, though these can be minimised by setting up a special purpose company (more on this below).

However, once established a corporate structure could prove cheaper to maintain. Because SMSF assets held by a fund under an individual structure are registered in the name of trustees, if a trustee were to leave the fund or pass away, legal ownership of all the fund's assets would need to be changed. This can be a costly exercise.

Does a corporate trustee offer greater protection?

Corporate trustee structures can offer SMSF members an additional level of protection over individual trustee structures.

If an SMSF were to be found doing the wrong thing and face penalties from the ATO or is sued for damages, the responsibility would sit with the trustees.

A corporate trustee is considered a single entity and, thus, may only receive a single penalty for each count of wrongdoing. Whereas individual trustees might each face a single penalty for each count of wrongdoing.

On top of that, individual trustees could risk personal losses in the case an SMSF is sued and damages total more than the funds' assets.

What is a special purpose company when it comes to SMSF trustees?

For SMSFs that don't have an SMSF loan and don't plan to borrow, a special purpose company might be more suitable than a regular company, according to Susan O'Connor Accounting principal and SMSF specialist Susan O'Connor.

Image: Susan O'Connor, Susan O'Connor Accounting principal and SMSF specialist

"As SMSF specialists, we often convert companies acting as the trustees of an SMSF to special purpose companies," she said. "The reasons are two-fold."

"Firstly, to save on fees. These special purpose companies can't do anything other than act as trustee of a regulated superannuation fund. In recognition of this, ASIC offers substantially reduced annual review fees.

Making the switch from a company to a special purpose company can save an SMSF hundreds of dollars each year, Ms O'Connor said.

"Secondly and more importantly, if the company is an older company (established before 1995), then the memorandum and articles will state two directors are required. The new constitution for the special purpose company will only require one director, as is consistent with superannuation law."

Advantages and disadvantages of both trustee structures

Depending on the circumstances, each of the structures has its own set of benefits and advantages over the other.

Benefits of an individual trustee structure

• Lower setup and running costs
  An individual trustee structure is cheaper to establish and maintain than a corporate structure, which requires ASIC fees.

• Fewer regulatory requirements
  Unlike corporate trustees, individual trustees don't have to comply with company regulations, making compliance simpler.

Downsides of an individual trustee structure

• Harder to add or remove members
  Changing membership is more complex because the ownership of assets needs to be updated each time.

• Higher exposure to penalties
  If the ATO issues penalties for administrative breaches, they apply to each trustee individually, which can increase the total cost of penalties.

• Extra admin for property transactions
  Trust declarations must be completed for property transactions, adding another layer of paperwork.

• Succession issues
  In the event of a member's death, succession planning can be more complicated due to additional administrative steps.

• Restrictions on SMSF loansMany lenders either won't accept or will restrict SMSF loans offered to individual trustee structures.

Benefits of a corporate trustee structure

• Easier membership changes
  Adding or removing members is more straightforward and cost-effective, as ownership of assets doesn't need to be altered.

• Greater flexibility
  A corporate trustee structure allows the fund to continue with just one director if other members leave, die, or become incapacitated.

• Stronger succession planning
  There's more certainty in the event of a member's death or incapacity, since remaining members can continue as directors of the trustee company.

• Preferred for SMSF loans
  Corporate trustee structures are generally favoured by lenders offering SMSF loans, potentially giving funds greater ability to leverage.

Downsides of a corporate trustee structure

• Higher setup and ongoing costs
  A company must be established to act as the trustee, which involves ASIC registration and annual fees.

• More compliance obligations
  The fund must follow additional laws under the Corporations Act, which can mean extra paperwork and oversight.

Which trustee structure is best for your SMSF?

Your SMSF's trustee structure will dictate how your retirement savings are controlled and managed. It's imperative that it's aligned with your financial goals and overall strategy.

To decide which trustee structure is right for you, you might wish to discuss these points with other SMSF members and/or a professional adviser:

1. Have you considered the costs and compliance requirements?
   Each structure comes with different setup fees, running costs, and regulatory obligations.

2. Do you intend to borrow through your SMSF?
   If you're planning to use a Limited Recourse Borrowing Arrangement (LRBA), also known as an SMSF loan, your SMSF will likely need a corporate structure.

3. What happens if a trustee leaves, becomes incapacitated, or dies?
   Succession planning is a critical factor. Corporate structures generally handle membership changes more smoothly.

4. How well are your assets protected?
   Consider the level of protection each structure provides against disputes, fraud, or administrative penalties.

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