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The SMSF Club | Do I choose Individual Trustee’s or a Corporate Trustee for my SMSF?
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Do I choose Individual Trustee’s or a Corporate Trustee for my SMSF?

22 Feb Do I choose Individual Trustee’s or a Corporate Trustee for my SMSF?

Posted at 11:32h in Articles, Latest Updates by sean

This is a great question. Many people choose to be individual trustees because the establishment and ongoing costs are less than the corporate trustee. While it appears to be a little cheaper upfront, there are additional responsibilities and ongoing liability that needs to be considered prior to deciding which option is best for you. This article compares the benefits and costs for both an individual trustee with that of a corporate trustee.

There are two alternatives with the trustee structure for a SMSF
Individual trustee, where each member of the fund is a trustee, or
A Corporate trustee, where each member of the fund is a director of the trustee company.

Individual Trustees

It is a legislative requirement that where a SMSF has individual trustees, there must be a minimum of two and a maximum of four trustees. The individual trustees are responsible for running the SMSF. Almost anyone over 18 can be a trustee of a SMSF including a spouse, your children (provided they are older than 18) or friends.

Advantages of having Individual Trustees

The main benefit of managing a SMSF with individual trustee’s is that the ongoing administrative requirements, and up front establishment costs are usually less than those associated with a corporate trustee.

Disadvantages of having Individual Trustees

  • Appointing additional members and trustees can result in tedious and expensive administrative work
  • You can not manage a SMSF as an individual trustee with only one member. Single member funds can only operate under a corporate trustee
  • Liability issues. If the SMSF is sued the right of indemnity can extend beyond just the assets of the SMSF. That is, if the assets of the SMSF are not sufficient to discharge the liability, then individual trustees may be liable for the shortfall personally. This risk is magnified when the SMSF owns an investment property (see case study below).

Corporate Trustee

You may select a company to act as a trustee for your SMSF. In this case, all members of the SMSF will need to be directors of the Company. The directors of the company will be responsible for the running of the SMSF.

Benefits of having a Corporate Trustee

A corporate trustee can offer the following long term benefits:

  • A company has the benefit of limited liability. If a Corporate Trustee suppers any liability, the individual directors will not suffer any personal liability (other than in exceptional circumstances).
  • A company continues to function even after the death of one of the SMSF members.
  • Assets are clearly separate from personal assets.
  • If a new member is introduced to the SMSF, then generally they must become a trustee of the fund. with a Corporate Trustee, then a new director needs to be appointed to the company and notified to ASIC, however with individual trustees the process is more complex, time consuming, and expensive. Titles will need to be changed for each asset held within the SMSF to reflect the change of trustees, however with a company the title remains the same.
  • When buying property and entering into limited recourse loan agreements, the banks will usually lend a corporate trustee additional funds to purchase the property. The borrowing rate under individual trustees is usually 72% versus up to 80% under a corporate trustee.

Disadvantaged of having a Corporate Trustee

  • Additional administrative costs to establish a corporate trustee.
  • Annual ASIC fees
  • Additional paperwork required, and directors have to comply with the company constitution and articles.

The Article below highlights some of the additional risks of having individual trustees as opposed to a corporate trustee when you own property in your SMSF.

Case Study

In August 2010 the District Court of NSW made a judgement where the owner of a residential investment property was found liable for the death of a handyman. The owner of the property was successfully sued by the widow of a handyman who died while carrying repairs on the property.

Now, if the property was owned by a SMSF with individual trustees, and the damages payable exceeded the value of the SMSF investments and the properties public liability insurance, then the individuals trustees themselves might be personally liable for any shortfall.

So if the SMSF only had investments valued at $200,000, no insurance on the property and the damages awarded were $1 million then the individual trustees themselves would have to pay the outstanding balance of $800,000.

How do you as trustee of a SMSF protect yourself from these types of personal losses?

Insurance – you need to ensure that any properties have appropriate insurance that also covers public liability if appropriate.

Investment selection – if your SMSF is going to purchase an older property that is going to require a lot of renovation or maintenance it will be more likely that potential accidents and injuries can occur. Ensure that this is considered when it comes to selecting a SMSF investment property.

Corporate trustee – this is the easiest and simplest method for SMSF trustees to protect themselves.
In the above real life example, if the property was owned by a SMSF with a corporate trustee, and the damages exceeded the value of the SMSFs investments, then the trustee company would have been liable for any excess amounts to be paid.

Typically when a special purpose SMSF trustee company is set up, it will issue shares to the directors (who are also the member of the super fund) – assuming two members each issued with a share valued at $1 each then you have what is sometimes referred to as a ‘$2 company’ – which is the most the members of the super fund can lose.

This type of legal protection is essential to all investors who want to use their super to purchase investment property.
It is virtually impossible to eliminate all risk when investing, and this is especially the case when it comes to investing in property, however the correct structure can minimise potential personal losses such as those highlighted within the article.

In addition to providing some protection from these rules, another benefit of a corporate trustee is that generally the bank will lend a SMSF with a corporate trustee more money than with individual trustee’s. The additional borrowing capacity further adds to the potential ongoing benefits of having a corporate trustee.

When thinking about establishing a SMSF, choosing the right type of trustee arrangement is an important decision. As a trustee of a SMSF in either structure you are responsible for the operations of the SMSF. It is an important role and is vital to ensure the ongoing compliance of your SMSF.