Should you change your SMSF from an individual trustee to a corporate trustee arrangement?

23 June 2020

SMSFs can be structured in two different ways, either as an individual trustee or as a corporate trustee and there are a number of benefits that a corporate trustee holds over an individual one.

If you currently hold your SMSF as an individual trustee, it may be worth exploring the possibility of changing it to a corporate one. To assist you, we have summarised the key advantages that corporate trustees hold over individual trustees.

1. Succession flexibility

When an individual trustee passes away, prompt action should be taken to ensure that assets are registered in the name of the current (i.e. living) trustees. This is not the case for a fund with a corporate trustee, as a company generally exists into perpetuity. In this case, only the directorship of the company needs to be updated, which is commonly a far simpler process. Having a corporate trustee also provides a better structure for handling member incapacity and divorce situations.

2. Ease of administration

With a corporate trustee, the admission of new members to the fund (such as children) and the acquisition or disposal of assets are generally a simpler process. The legal ownership of the fund’s assets does not need to be changed every time a member joins or leaves the fund. It is also easier to show that the fund remains an Australian resident fund should members move overseas for a period of time.

3. Commercial necessity

It is highly likely that a lending bank will require the fund to have a corporate trustee if the SMSF elects to use a limited recourse borrowing arrangement.

4. Sole member status

If an SMSF with individual trustees is reduced to only one member (e.g. due to marriage break-down or if a member passes away), then the remaining member will not be able to continue the trusteeship of the SMSF by themselves and will need to find an additional trustee for the fund. With a corporate trustee, a remaining member can continue on as a sole director of the company.

5. Lower penalties

Under the new penalty regime for SMSFs, only one penalty unit is applied to a fund with a corporate trustee. However, for individual trustees, each trustee is penalised personally, resulting in at least double the penalty.

6. Lump sum and pensions

An SMSF with a corporate trustee can pay benefits either as pensions or as lump sums. For individual trustees, a lump sum can only be paid by surrendering a pension entitlement or commuting a pension which gives rise to extra paperwork.

7. Greater asset protection

Companies are subject to limited liability; therefore, a corporate trustee will provide greater protection where a party sues the trustee for damages. However, if an individual trustee suffers liability, the trustee’s personal assets may be exposed.

8. Clear separation of asset ownership

A corporate trustee structure separates your personal and superannuation assets and gives clarity as to what assets are being dealt with.

It’s important your SMSF is structured in a way that’s appropriate for your specific circumstances. Get in contact with the Findex SMSF team today for assistance or speak to your adviser.

For more SMSF and superannuation information, take a look at these videos.

A refresh on COVID-19 measures for superannuation

Understanding property investment through SMSFs

SMSF webinar | Year-end tax planning

SMSF webinar | Estate planning