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SMSF Structure - Why a Corporate Trustee is better than Individual Trustee

Discussion in 'Accounting & Tax' started by Redwood, 5th Jan, 2016.

  1. Redwood

    Redwood Well-Known Member

    22nd Jun, 2015
    Recent ATO data shows corporate trustee structures are still out of favour with SMSFs, but in many cases the benefits of this structure outweigh the short term cost savings of an individual trustee.

    When deciding whether an SMSF is right for your client, practitioners are faced with their first question – will an individual or corporate trustee structure be best for the client and their SMSF?

    When setting up an SMSF, individuals must appoint either two or more individuals or a company to act as the trustee of their fund. The trustee structure the client chooses is critical for the long-term operation of their fund and will influence how their fund is administered and the cost of setting up and running their fund.

    It’s important the practitioner helps the client choose the structure that best suits their needs and the needs of the other members in their fund.

    Member and Trustee Requirements

    Individual Trustee Structure

    Under superannuation law, an individual trustee structure means you cannot have a single member fund; you must have at least 2 members and a maximum of 4 members. Generally, subject to certain exceptions, all members must be trustees of the fund and all trustees must be members of the fund.

    Typically, an individual trustee structure will incur lower costs than a corporate trustee structure particularly with a number of online administrators offering “free SMSF set-up” to establish an SMSF with individual trustees. However, these cost savings are often negated by the potential fees and difficulty involved with adding or removing a member, the death of a member and when member’s circumstances change, which often outweigh the upfront cost savings. A prime example where a member’s circumstances change is often around succession planning, where a member is removed from the SMSF, for instance, death of a member or a marriage breakdown.

    Corporate Trustee Structure

    While establishing an SMSF with individuals as trustees may save the client a few dollars in the short term, the benefits of registering a corporate trustee for their SMSF far outweigh the short term savings. Here are the key reasons why we believe you should advise clients to use a corporate trustee.

    5 Key Reasons to use a Corporate Trustee

    Asset protection/ Separation of assets

    Having a corporate trustee reduces the risk of personal assets becoming intermingled with SMSF assets. Companies have limited liability, where a corporate trustee provides greater protection if the trustee is sued for damages.

    ATO Penalties

    If the complex superannuation laws are breached, administrative penalties may be levied on each trustee. Therefore, the trustees would each be liable individually for penalties incurred. This is an obvious advantage for corporate trustee which in the event of non-compliance will be levied with one penalty as opposed to a penalty for each individual trustee.

    Borrowing to purchase property

    A corporate trustee is a must for both the SMSF trustee and bare trustee when purchasing property both for asset protection and also to satisfy the lenders borrowing criteria. In the current environment, many lenders will require a corporate trustee for the SMSF, and if allowed will limit the loan to value ratio for the loan for individual trustees.

    Succession upon death

    A company continues indefinitely in the event of a member’s death, ensuring control of the super fund is always certain. This is an especially important factor when a member of the fund dies or becomes permanently incapacitated.

    Ownership of SMSF Assets

    Registering ownership of assets can be simpler for a corporate trustee rather than individual trustee. Further, when a member of an SMSF resigns or ceases to be a member of an SMSF, no changes will need to be made with titles office or share registry whereas with an individual trustee, changes will need to be notified immediately.

    Current Trends

    Due to the influx of online SMSF providers offering “free SMSF set-up” and the lack of advice of the benefits of corporate trustee, according to the Australian Taxation Office; over 95 per cent of new SMSFs are established with an individual trustee rather than 5 per cent with corporate trustee. Further, 78 per cent of the more than 500,000 SMSFs had individual trustees at 30 June 2015. In my view, corporate trustee is always the best choice and more attention should be provided by the regulator on these bewildering statistics, particularly in light of the five key benefits highlighted above. Any accountants or advisors providing a recommendation of individual trustees should be made to justify this decision.

    This trend can be seen to correlate with the increase of online providers in recent years which can include outsourcing accounting functions to foreign countries such as Sri Lanka or Vietnam to name a few. Effectively, many online providers focus on low cost SMSFs; however do not provide guidance or advice on the best structure based on a client’s individual situation.


    SMSFs are all about strategy – a key component of SMSF strategy is the structure chosen. It is important to consider the benefits in the long term of a corporate trustee structure and not the set up cost of a company. As identified, the benefits of a corporate trustee structure over the long term clearly outweigh the short term cost savings of an individual trustee structure. For me – its corporate trustee 100 per cent of the time.

    Note - we published this article in SMSF Adviser - no link to Redwood Advisory provided.
  2. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

    18th Jun, 2015
    Other benefits of a Corporate Trustee :

    # Succession on death. A mere change of Director by Form 484 may be required. For individual trustees ALL fund assets must be legally changed. Land title changes can be VERY complex. Share changes can be costly.

    # Credit Laws. Many bank lenders will not lend to a SMSF with human trustees or may imposes different rules and costs. A good example of the problem is found with a bare trust....If it also had human trustees does it still exist and what rules apply upon death ?

    # Changes to the deed when members are added later. Adding a new member to a SMSF with human trustee /s will usually result in the bank refusing to open a bank account until the deed is amended. The bank wont allow the existing account to remain open either !! This same issues can occur with a corporate trustee also with some trust deeds BUT it is always a concern with all human trustees.

    # In my experience, funds with human trustees often also skip and save money on binding death nominations and estate planning too. Unfortunately this isn't detected until death. Is there a pension agreement and is it reversionary ??? Major tax implication WILL result from overlooking this.

    Ivan raises very good points about why ASIC are aggressively attacking providers who offer "FREE" SMSF setups as bait. They argue there is no such thing as free.