One of your most important decisions when setting up a self-managed super fund is whether to have individual trustees or a single corporate trustee. It may not be as glamorous as selecting and managing investments, but the choice of trustee can have far-reaching implications over the life of your fund.
To date, the vast majority of SMSFs have individual trustees. The figure was almost 74% in 2010-11, and rising. In the same year 90% of new funds were set up with individual trustees.
Opting for individual trustees seems natural given that most people start their own fund to have more control over their investments and save on costs. Using individual trustees is the cheaper option in the initial set-up phase, but a growing number of SMSF specialists and financial advisers are recommending a corporate trustee as the longer-term benefits become more apparent.
When you run your own super fund the buck stops with you. Not only are you ultimately responsible for all investment decisions but you are also responsible for compliance with taxation laws and superannuation laws.
In order to receive the tax and associated benefits that make the effort of running your own fund so worthwhile, it can have no more than four members and each member must be a trustee or a director of a corporate trustee.
In practice, the choice of trustee will come down to individual preference as well as your financial and family circumstances. Here is a brief summary of advantages and disadvantages of each:
- Cost. Signing on as individual trustees is cheap and easy to set up. There is no need to pay an establishment fee or ongoing compliance costs to the Australian Securities and Investments Commission (ASIC) and this in turn means less paperwork, at least in the set-up phase.
- Simplicity. Most SMSFs are family affairs, with a husband and wife as the sole members and trustees. Individual trustees can be the simplest option where the likelihood of changes to trustees/members is minimal. Things are more complicated if you are flying solo. There is nothing stopping you being the sole member of your fund but you must have at least two trustees. This means appointing an outsider who is willing to take on the responsibility of trustee without the benefits of membership, a big ask given that trustees can’t be paid.
- Good housekeeping. Individual trustees need to keep clear records to ensure that fund assets and personal assets are kept separate and easily identifiable. Failure to do so could put fund assets at risk if a member goes into bankruptcy.
- Transparency. A fund with individual trustees must follow any rules and procedures set out in its trust deed. This covers things such as the fund’s objectives, how trustees are to be appointed and removed, how contributions and benefits are to be made and paid, and procedures for winding up the fund. A corporate trustee usually covers these issues in its Memorandum and Articles (or Constitution). This can cause confusion if the company’s Constitution is at odds with its trust deed, in which case the company has the deciding vote.
- Cost. An existing company can be dusted off for the job of corporate trustee but this is not recommended. Keeping super assets separate to other family assets can reduce administrative problems down the track. A better option is a Superannuation Trustee Company, which has the sole purpose of acting as trustee of your fund. This costs less than $1000 and qualifies for a lower annual review fee than other company types.
- Administration. Legislation states that fund assets must be held in the name of all trustees. If you add or remove a member, due to marriage, divorce, the death of a member or the inclusion of a child, you have to add or remove the name on all the fund’s investments. With a corporate trustee, all assets are held in the company name. If there is a change in members all that is required is notification to ASIC within 14 days. If your fund has three or four members, then a corporate trustee makes even more sense. With individual trustees every member has to sign documents; when the fund opens a new bank or share trading account for example. With a corporate trustee, any two directors can sign.
- Flying solo. If you have a single-member fund then a corporate trustee saves a lot of hassle. With a corporate trustee you can have just one director, yourself, but you can’t be a single member and sole individual trustee. That means finding someone to act as a joint trustee, including them in all decision-making and getting them to co-sign documents. A corporate trustee can also be useful for husband and wife funds when one member dies. Instead of having to find a replacement trustee at such a difficult time, the surviving spouse simply needs to notify ASIC of the death and elect to continue as sole director.
- Estate planning. Superannuation assets are generally considered as non-estate assets, which means they are not included in your will. But a corporate trustee does not die, even if all its directors do; the company can continue with new shareholders who have inherited the shares. This provides greater flexibility and can open up estate planning opportunities and strategies. As this is a complex issue it is worth seeking professional advice.
If you are contemplating setting up your own super fund, take the time to consider the advantages and disadvantages of individual and corporate trustees, not just in the short term but with a view to the future.