Choosing your SMSF Trustee: Company or Individuals?

Taking time to select the right type of trustee is a vital step in establishing a Family Superannuation Fund.  We generally recommend that a corporate trustee be used for the reasons discussed below.  The major disadvantage of a corporate trustee is the up-front cost of establishing the company however there are longer-term benefits of having a company which we believe generally outweigh the extra costs. Once you have decided on which trustee situation suits you best you will find our trustee decision tree useful.

Pension v Lump-Sum Benefits

Superannuation funds must have either:
1. A company appointed as trustee; or
2. Where individuals are appointed as trustees - the fund's sole or primary purpose must be the provision of old-age pensions.

Thus, if members want the certainty of being able to receive lump-sum benefits in the future, a company should be appointed as trustee.

Administrative Efficiency

Each member of a SMSF must generally be a trustee or, in the case of a corporate trustee, a director of that company. In addition, generally a person who is not a member is not permitted to be a trustee.

To introduce a new member to a SMSF with individual trustees requires that person to become a trustee.  As trust assets must generally be held in the trustee's name this will require the transferring of the titles to all assets (e.g. real estate, shares, bank accounts, etc.) to the new trustees when a new member is admitted to the fund.  The same administrative hassle and expense applies when a member leaves a fund upon death, retirement or otherwise.

In contrast, all that is required when members are admitted to, or ceases, membership of a fund with a corporate trustee is that the person becomes, or ceases to be, a director of the company.  A notification of this change must be sent to the Australian Securities & Investments Commission ("ASIC") within 14 days of the change.  The legal title to all the assets remains vested in the company which continues to act as trustee.  A corporate trustee will save considerable time and effort where the fund's assets are significant.

Sole Trustees

If a member is the only member of the fund and wishes to act as personal trustee then another person must be appointed as a sole member cannot be the sole trustee. This means that another person is involved in fund decisions. A sole member is able to be the only director of a corporate trustee so will have total control of the fund.

Instalment Warrants

If the SMSF is borrowing from a non-associated lender under an instalment warrant arrangement the lender will insist on a corporate trustee for the SMSF.

Benefits of a Sole Purpose Trustee Company

If you already have a family company, this company can act as trustee of your SMSF, so long as the company's other roles are kept separate.  This ensures that, if the trustee goes into liquidation or bankruptcy, the assets of the fund are outside the reach of creditors. It is generally preferred, however, that a SMSF have a dedicated sole-purpose trustee company which reduces the risks of making mistakes (e.g., banking money in to the wrong bank account) and possible conflicts of trustee duties. As discussed, every member of the fund must be a director and no other person can act as a director. This can cause various problems with family companies involved in business.

If you do not already have a family company and a corporate trustee is required, the cost of establishing and running a company should be considered. 

Liability Issues

If an individual trustee suffers any liability, the trustee's personal assets may be exposed.  Trustees of funds are generally prohibited from borrowing but nevertheless liabilities can still arise.  For example, a contractor engaged to repair a rental property may suffer an injury and can sue the trustee for damages. Alternatively, a fund may invest in a property syndicate that acquires land which is subject to the hefty costs of an asbestos or environmental clean-up. As companies are subject to limited liability a corporate trustee will remove the risk that an individual trustee suffers a personal liability in these cases.

Succession Issues

As a company and a super fund have an indefinite life span, a corporate trustee can make control of the fund more certain in the circumstances of the death or incapacity of key members. Further, the shares of the trustee company may be arranged so as to ensure that control of the company is passed in line with the deceased shareholders estate planning goals.