One of the key decision you need to make when you set up an SMSF is whether to use a corporate trustee vs individual trustees. Many online providers will default to setting up an SMSF with individual trustees to make the establishment cost cheap or free, however this is not always the best choice of SMSF trustee.
Similarly, many advisers and SMSF specialists will default to a corporate trustee which is generally a superior option, however the decision on corporate trustee vs individual trustee should be made based on all the relevant facts applicable to your situation.
It’s important that you set up an SMSF the right way to ensure you don’t run into problems and additional costs and paperwork in the future.
Individual trustees of an SMSF
As per the above diagram, two or more individuals can be the trustees of an SMSF. Bank and investment accounts are set up in the name of the trustees as trustee for the SMSF, for example: John Smith & Jane Smith as trustee for J&J Super Fund.
Advantages of individual trustees for an SMSF
There following is a summary of advantages and disadvantages of having individual trustees of an SMSF:
|Nil upfront and ongoing costs||Less liability protection for trustees personally|
|Faster and simpler SMSF set up||All investments must be changed if members change|
|Suitable for SMSFs with simple investments||If trustees fined by ATO, each trustee must pay|
|Suits SMSFs where members are a couple||Does not suit single member SMSFs|
|Potential intermingling of personal assets and SMSF assets|
The following indicate that an individual trustees may be suitable when deciding corporate trustee vs individual trustees for an SMSF:
- The investment strategy and investments are likely to be restricted to simple assets including: cash, term deposits, listed shares, managed funds and ETFs (i.e. NOT direct property)
- The SMSF is not borrowing (including to buy direct commercial or residential property)
- The membership is made up of a two individuals who are a couple (in a spousal relationship) and is unlikely to change in the long term – i.e. other members will not be added or removed from the fund
- If one of the members exits the fund (for example through death or divorce) it’s likely the SMSF will be closed rather than continue as a single member fund
Although it is cheaper to use individual trustees when setting up an SMSF, cost should never be a determining factor when choosing the most appropriate trustee structure. In most cases an SMSF will operate for many decades, so the cost of setting up a trustee company is very low when spread across 10, 20 or 30 years.
Company trustee for an SMSF
As shown the in above diagram, a ‘special purpose’ proprietary limited (Pty Ltd) company is set up to act as the trustee of the SMSF. Bank and investment accounts are set up in the name of the trustee company as trustee for the SMSF, for example: J&J Smith Super Pty Ltd as trustee for J&J Super Fund.
Advantages of a company trustee for an SMSF
There following is a summary of advantages and disadvantages of having a company trustee of an SMSF:
|Liability protection for the SMSF members as individuals (Read more here).||Initial upfront and minor ongoing costs|
|Slightly more complex SMSF set up process||Additional administration to keep ASIC updated (minor)|
|Suitable for SMSFs with more complex investments including property||Some investment account application and set up processes may be slightly more tedious|
|Suits SMSFs where members are a not just a couple (multi-generation or other relationships)||Some providers charge additional ongoing fees to act as a registered agent (ASIC) or to be the registered office|
|ATO fines only issued once to the company trustee||Minor additional cost and additional paperwork to de-register the company when the SMSF is closed|
|Often required by lenders for SMSF loans||ASIC late fines many apply when annual registration fees are missed or paid late|
|When members change accounts and investments stay in the same name|
|Enables single member SMSFs|
|Electronic signing of SMSF trust deed possible (legislation in draft – October 2020 – learn more)|
Some of the above are also covered in our other article: Reasons you need a special purpose trustee company for your SMSF
The following indicate that a company trustee may be suitable for an SMSF:
- The investment strategy and investments are likely to be restricted to more complex including: direct residential or commercial property
- The SMSF will borrowing (including to buy direct commercial or residential property) using a limited recourse borrowing arrangement (LRBA)
- The membership is made up of individuals who are not in a spousal relationship including relatives, children or parents, friends, business partners etc
- The members of the SMSF are likely to change in the future, for example including children as members (both as minors as well as when the are adults over 18)
- If one of the members exits the fund (for example through death or divorce) it’s likely the SMSF will continue running as a single member fund
In summary, when looking at corporate trustee vs individual trustee SMSF, a company trustee in most cases going to provide you a superior long-term solution compared to individual trustees for your SMSF.
SMSF trustee company set up and and ongoing costs
The only practical disadvantage of using a special purpose company trustee vs individual trustees SMSF is cost.
As of 1 July 2020, the cost of registering a new company with ASIC is $506, and most providers add their professional fees to that amount making the typical additional upfront cost of a SMSF trustee company between $700 and $1200. The ongoing cost a special purpose company that only acts as trustee of an SMSF is $55 per annum from 1 July 2020. This fee is discounted compared to the $267 per year for a standard proprietary limited company that trades or acts as a trustee of a family trust for example.
One method to easily reduce the ongoing costs of a trustee company of an SMSF is to prepay the ASIC annual registration fees for 10 years. This cost is $383 from 1 July 2020 for a special purpose SMSF trustee company and considering the fees are indexed by ASIC each year, it will save approximately $200 over 10 years. In addition the likelihood of being fined late fees for not paying the annual registration fee on time is removed. The current late fees are $82 if payment is late by up to one month, and $340 if more than one month late.
All ASIC company fees for a trustee company are paid by the SMSF.
For a full list of ASIC fees applicable from 1 July 2020, visit the ASIC website: Fees for commonly lodged documents
Can the trustee be changed after set up?
Yes. Changing the trustee of an SMSF is possible. You can change from individual trustees to a company, and also from a company to individuals. A change of trustee is typically undertaken by either a lawyer or specialist SMSF provider.
A Deed of Appointment and Removal document is normally prepared which all members and trustees sign, then the investments and accounts are moved into the name of the new trustee(s).
The complexity of the process will typically be dependent on the investments and accounts the SMSF holds. In all cases professional advice should be sought because if not completed correctly could create a number of compliance problems.
Changing the trustee of an SMSF does not trigger any capital gains as the beneficial owner (i.e. the SMSF) is unchanged.
When making the important decision on corporate trustee vs individual trustees SMSF then most people are better suited to using a special purpose trustee company for their SMSF.
Individual trustees should only be used by exception when the investments are going to be (and stay for the life of the SMSF) simple and the membership is NEVER going to change (cannot be guaranteed!).
An alternative view is that you setup your SMSF with individual trustees and change it in the future. The advantage short-term is cost savings however long-term to cost and time to change could outweigh the savings.