ONE of the key steps in setting up a self-managed superannuation fund is deciding who will act as trustee of the fund. Data recently released by the Australian Tax Office shows that 73 per cent of all self-managed superannuation funds have individual trustees. The alternative to this is having a company act as trustee. Although this is more expensive, it should be the preferred option.
In addition to the benefits of having a company act as trustee when a member dies, a recent case heard by the Administrative Appeals Tribunal highlights another important benefit.
The case involved a husband and wife who acted as trustees for their self-managed super fund. The husband and wife split up and the husband illegally withdrew almost $3.5 million from the fund, transferring it overseas.
The Tax Office fined the trustees about $1.6 million. As the fund had no assets, the Tax Office pursued the wife as the only remaining trustee. The tribunal decided that the wife was personally liable.
This is an isolated and rare case but underlines an important fact when acting as an individual trustee for a super fund. When something goes wrong, whether it is an action brought by a regulator such as the Tax Office or there is a legal claim for damages, the personal assets of the individual trustee are at risk.
Appointing a company to act as trustee for a superannuation fund is like taking out insurance. If something goes wrong, the individual members of the fund receive protection by having a company as the trustee. The company acts like a form of death insurance.
When a trustee member of a self-managed superannuation fund dies, the surviving trustee member can find themselves entangled in a bureaucratic nightmare.
The first thing that must be done is to decide whether to find another member that will act as a trustee of the super fund. This is because a self-managed super fund must have at least two individuals acting as member trustees.
If no one can be found to take on the position of a trustee member, a decision must be made to either wind up the fund, and the benefits paid out or rolled into another superannuation fund, or to convert the fund to a small APRA fund, and appoint a professional trustee company.
If a new member is found, the names in which all of the investments in the super fund are held must be changed. The name of the deceased member must be removed and the new trustee must be included. This will not only involve providing documentary evidence of the appointment of the new trustee but also the new trustee must establish their identity.
Under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006, a person must establish their identity by providing original or certified copies of identity documents for all investments. If the self-managed fund has a large number of investments, this will mean a mountain of paperwork must be completed.
If a self-managed superannuation fund has a company acting as trustee when a member dies, nothing needs to be done. The only time a self-managed superannuation fund can have a single member is when a company acts as trustee.
Because all of the investments are already in the name of the company trustee, the self-managed superannuation fund continues to operate as it always had.
Having a company act as trustee also makes it easier to clearly differentiate between personally-held investments and self-managed superannuation fund investments. In addition to the cost of incorporating the company, there is a small annual lodgement fee.
Frequently Asked Questions about this Article…
What trustee options do I have when setting up a self‑managed superannuation fund (SMSF)?
You can appoint individual trustees (most common — the ATO says about 73% of SMSFs use individual trustees) or set up a company to act as the trustee. A company trustee is more expensive because of incorporation and annual fees, but the article says it is generally the preferred option for the additional protection and ease of administration.
What are the risks of having individual trustees for my SMSF?
Individual trustees face personal liability if something goes wrong. The article highlights a case where a husband illegally withdrew almost $3.5 million and the remaining spouse was pursued by the Tax Office and made personally liable, with fines of about $1.6 million. That example shows regulators or legal claims can put an individual trustee's personal assets at risk.
How does a company trustee protect SMSF members compared with individual trustees?
A company trustee creates a layer of protection for members' personal assets: investments are held in the company's name, so if there’s a regulatory action or legal claim the company — not the individuals — is the trustee of record. The article describes this as like taking out insurance or a form of death insurance because it helps shield members from personal liability and provides continuity when a member dies.
What happens to my SMSF when a trustee member dies?
If a trustee member dies and the fund uses individual trustees, the surviving member must either find another member to act as trustee (SMSFs normally require at least two individual member-trustees), wind up the fund and pay or roll over benefits, or convert the fund to a small APRA fund and appoint a professional trustee company. If the fund already has a company acting as trustee, nothing needs to be changed because investments remain in the company’s name.
Will appointing a company trustee reduce paperwork when a member dies?
Yes. Because investments are held in the company trustee’s name, the fund can continue to operate without changing investment title documents. This avoids the large amount of paperwork and identity checks that would otherwise be required when replacing an individual trustee.
What identity documents are required to change trustees or update investment ownership in an SMSF?
Under the Anti‑Money Laundering and Counter‑Terrorism Financing Act 2006, a new trustee must establish their identity by providing original or certified copies of identity documents for all investments. The article notes that if the SMSF has many investments this can create a ‘mountain of paperwork.’
Are there extra costs to using a company as an SMSF trustee?
Yes. The article notes incorporation costs to set up the company plus a small annual lodgement fee. Despite these additional costs, the article suggests a company trustee should be the preferred option because of the protection and administrative benefits.
Can an SMSF have a single member and when is that allowed?
A self‑managed superannuation fund can have a single member only when a company acts as the trustee. With a company trustee the fund can continue to operate with a single member because the company — not individuals — holds the investments.
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