ONE of the key steps in setting up an self-managed superannuation fund is deciding who will act as trustee.
Tax Office data shows 73 per cent of SMSFs have individual trustees.
The alternative is having a company act as trustee. Although this 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 SMSF. The couple split up and the husband illegally withdrew almost $3.5 million from the super fund and transferred 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 AAT decided that the wife was personally liable.
This is a rare case but it is a good example of 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 super fund is like taking out insurance. If something goes wrong, the individual members of the fund receive protection by having the trustee company.
The major benefit of the trustee company for a self-managed super fund is that it acts like death insurance. When a trustee member of an SMSF dies, the surviving trustee member can become entangled in a bureaucratic nightmare. The first thing that must be done is find another member to act as a trustee of the fund (this is because a self-managed fund must have at least two individuals as member trustees), or, 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 the self-managed super fund converted to a small APRA fund and a professional trustee company appointed.
If a new member is found, the names in which all the investments in the super fund are held must be changed, first, to remove the name of the deceased member and, second, to include the name of the new trustee. 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. Where an SMSF has a large number of investments, this will involve a mountain of paperwork.
If an SMSF has a company as trustee when a member dies, nothing need happen.
The only time an SMSF can have a single member is when a company acts as trustee. Because all the investments are already in the name of the company trustee, the SMSF continues to operate as it always has.
Having a company as trustee also makes it easier to differentiate between personally held investments and SMSF investments. In addition to the cost of incorporating the company, a small annual lodgment fee applies.
Frequently Asked Questions about this Article…
What are the main benefits of appointing a company trustee for an SMSF?
A company trustee provides continuity and protection: all investments are held in the company name so the fund can keep operating if a member dies, and a company structure helps separate SMSF assets from individual personal assets. The article describes this as similar to "death insurance" for the fund and notes it also makes it easier to differentiate personally held investments from SMSF investments.
Are there risks to being an individual trustee of a self-managed super fund (SMSF)?
Yes. The article highlights that when something goes wrong — for example a regulator action or a legal claim — the personal assets of individual trustees can be at risk. A recent AAT case showed a surviving individual trustee was found personally liable after the fund had no assets following an illegal withdrawal by the co-trustee.
What happened in the AAT case that illustrates trustee liability for SMSFs?
The article describes a case where a husband and wife were joint individual trustees. The husband illegally withdrew almost $3.5 million and transferred it overseas. The Tax Office fined the trustees about $1.6 million; because the fund had no assets the Tax Office pursued the wife as the only remaining trustee and the Administrative Appeals Tribunal found her personally liable.
How does a company trustee make managing an SMSF easier when a member dies?
If a company is the trustee, nothing needs to happen when a member dies because investments are already held in the company name and the fund can continue to operate. By contrast, individual-member trustees must find another member to act as trustee (SMSFs generally require at least two individual member-trustees), or else wind up the fund, roll benefits into another fund, or convert to a small APRA fund and appoint a professional trustee company.
What paperwork is involved if an individual trustee dies and a new trustee is appointed?
All investment holdings must be re-titled: first removing the deceased member’s name and then adding the new trustee’s name. That involves providing documentary evidence of the appointment and identity verification for the new trustee, which can be a large amount of paperwork if the SMSF has many investments.
What identity checks are required under anti‑money‑laundering rules for SMSF trustee changes?
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. The article warns this can mean a mountain of paperwork when changing trustees or updating investment registrations.
What options does an SMSF have if no one can be found to act as a new trustee member?
According to the article, if you cannot find a new member to act as trustee you must either wind up the fund and pay out or roll benefits into another superannuation fund, or convert the SMSF to a small APRA fund and appoint a professional trustee company to manage it.
How common are individual trustees in SMSFs and should everyday investors consider a company trustee?
The Tax Office data cited in the article shows about 73% of SMSFs have individual trustees. The article suggests that although a company trustee is more expensive (incorporation costs plus a small annual lodgment fee), it should be the preferred option for the protection and continuity it provides.
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