There is ongoing debate about whether a Self-Managed Super Fund (SMSF) should have individual or corporate trustees. The primary concern often revolves around the additional costs involved in establishing and maintaining a corporate trustee. While a corporate trustee involves a higher initial setup cost and ongoing fees, these fees are discounted by up to 80% for a special-purpose corporate trustee. In some rare cases, members may also resist the corporate trustee option because they don’t want to obtain a director ID.

Fund members

Over the life of an SMSF, it’s common for members to join or leave the fund, or for a member to pass away. For an SMSF with individual trustees, this requires updating the title of each investment and amending the trust deed to reflect the new trustee situation. This process can be particularly cumbersome when dealing with real estate, where changing the title can be difficult. While other assets may be easier to update, the administrative burden can still be significant. Additionally, in funds where the members are typically a couple, the administrative complexity of changing trustees can add further emotional strain on the surviving spouse when one member passes away. With a corporate trustee, this process is much simpler. The trustee entity remains unchanged, and only a notification to ASIC is required, even if the number of directors reduces to just one.

When it comes to a single-member fund, two individual trustees are required. By contrast, with a corporate trustee, the single member can act as the sole director, allowing for full control without the need to involve a second, non-member director.

Decision making

Another important consideration is trustee decision-making. In an SMSF with individual trustees, decisions typically need to be unanimous, which can create issues if disputes arise between trustees. While some trust deeds include provisions allowing majority decisions or granting greater voting rights to certain trustees, these provisions can be subject to legal challenge. In contrast, corporate trustees allow for decisions to be carried by a majority, and shares in the corporate trustee can be structured with different voting rights.

Asset separation

Corporate trustees are also effective in maintaining separation between SMSF assets and personal or business assets, something the regulator requires. This separation is particularly useful in the event that a member or their business faces bankruptcy or a receiver is appointed. There have been instances where SMSF assets, particularly property, were unintentionally used to secure personal or business debts, leading to the loss of the assets from the fund and potential penalties from the regulator. In cases where no encumbrance exists, proving ownership to a receiver can still take time if the assets are held in the names of individual trustees.

Borrowing impacts

Financial institutions may also favour corporate trustees when the SMSF seeks to enter into limited recourse borrowing arrangements. In many cases, a corporate trustee may secure a higher borrowing amount or a lower interest rate, and some lenders require a corporate trustee as a condition for the loan.

Penalty regime

One of the strongest arguments for a corporate trustee is the impact of the SMSF penalty regime. Penalties for common compliance breaches, such as lending to members or breaching in-house asset rules, are imposed on a per-trustee basis. For a four-member SMSF with individual trustees, penalties could be four times higher than for the same SMSF with a corporate trustee.

Conclusion

In conclusion, we strongly recommend corporate trustees for all SMSFs as the benefits of corporate trustees in terms of compliance, flexibility, and protection are clear.

Contact Pilot

If you would like any assistance with the above, please contact Kristy Baxter or Angela Stavropoulos on taxmed@pilotpartners.com.au or (07) 3023 1300.