Are you better off as an individual or a corporate trustee in your SMSF?

— 8 min read

If you are setting up a Self Managed Superannuation Fund (SMSF), you will need to decide whether you want a corporate trustee or an individual trustee to manage the fund. If you have already set up your SMSF with an individual trustee, you may wish to consider the benefits of changing to a corporate trustee.

It is commonly understood that a corporate trustee affords the SMSF’s members with the most flexibility and highest protection in relation to legal exposure.

Some of the main benefits of utilising a corporate trustee as opposed to individuals acting as trustee, include.

The requirement that all members must be trustees or directors of the trustee of the Fund

Due to the way a SMSF acquires assets (e.g. in the name of the trustee), where a member is admitted or exits and an individual trustee is involved, transfer of legal title of all fund assets is required because the composition of the “trustee” must change. Corporate trustees simply admit/retire a member as a director and no transfer of legal title is required.

Separation of assets

Given that a SMSF acquires assets in the name of the trustee, confusion can arise between an individual trustee’s personal assets and assets held by them in their “capacity” as a trustee. Significant penalties of up to $18,000 can arise where the SMSF’s assets are inadvertently, or otherwise, used by an individual for personal purposes. Corporate trustees avoid this problem.

Liability

A trustee can be exposed to third party claims for damages in relation to the SMSF they manage. If the trustee is an individual, they may become “personally liable” for such claims. A company has a limitation of liability and therefore, the personal assets of a directors are not ordinarily exposed.

Corporate penalty regime

The penalties associated with a breach of the superannuation legislation by a corporate trustee are generally lower than those applied to individual trustees. This is because only one fine will be issued to the company itself, as opposed to separate fines for each individual trustee. Depending on the penalty, this could expose the trustee’s personal assets to liability.

Succession

The most common reason for having a corporate trustee is succession planning. A corporate trustee has an indefinite life span and will continue after the cessation of membership (by death, retirement or otherwise).

Withdrawal of lump sum benefit

Where a corporate trustee manages a SMSF, it is permitted under the superannuation legislation to pay benefits in the form of a lump sum or pension. This may not be the case with individual trustees who have not allowed for this in the SMSF trust deed.

The decision to appoint an individual or corporate trustee is a major one with serious potential financial implications for the individuals involved. We recommend that such a consideration be made together with an overall estate planning review to ensure that your objectives are satisfied, assets protected and the desired level of succession obtained.

If you would like any assistance with your SMSF, please contact Josh Flett for a preliminary discussion.

Disclaimer: This article was outsourced. DPM communications are intended to provide commentary and general information. They should not be relied on as legal or financial advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication.

Authors

Josh Flett