So you have decided to take initiative and manage your self-managed super fund (SMSFs). You are given the option of choosing between two structures that may potentially affect how much control you can have over your retirement funds. First, an individual trustee. Second, a corporate trustee. It is important that you learn about these structures, in order to determine which one better suits your needs and the needs of other members of your fund. The trustee structure you choose will affect how your fund is administered, as well as the costs of setting up and running your fund. In this guide, we will focus primarily on the individual trustee structure.
If you’re interested in learning about a corporate trustee structure, you can check out our previous guide What You Need To Know About A Corporate Trustee Structure.
For greater legal guidance get in touch with a business lawyer to find out which trustee structure is appropriate for your SMSF.
What Is A Self-Managed Super Fund?
Basically, a SMSF is a private superannuation fund that is regulated by the Australian Taxation Office (ATO). It is a legal tax structure with the purpose of providing for your retirement. You can manage this superannuation fund by yourself, and/or appoint up to four members that are trustees (or directors) who are responsible for making decisions about the fund. These members can be a group of individuals or a company.
In order to qualify as an SMSF, you are required to appoint either a group of individuals or a company to act as the trustee of your fund.
What Is An Individual Trustee?
An individual trustee is a structure that has up to four individuals who are called the trustees of the SMSF. Each trustee has an active role in managing the trust and complying with relevant super and tax laws. There are numerous considerations you must take account of when selecting an individual trustee structure. Generally, members of the fund cannot simultaneously be an employee of another member of the fund, unless they are relatives. Another requirement is the trustees cannot be paid for their services (however, it is possible in some circumstances). A distinguishing feature of an individual trustee structure is the assets of the fund need to be registered in the name of the individual trustees of the fund.
According to recent tax office statistics, 93 per cent of SMSFs established in 2015/2016 had individual trustees, whereas one-third of SMSFs have corporate trustees.
There are advantages of an individual trustee structure:
- An individual trustee structure is recommended if you are cost conscious. Typically, it is cheaper to establish an SMSF with an individual trustee. The ongoing administrative requirements and establishment costs are less as there are no ASIC fees. However, be aware if you later decide to make changes to the members of the fund by either adding or removing them, there are potential fees that may be incurred, which can outweigh cost savings.
- Another advantage is its simplicity. Unlike a corporate trustee, an individual trustee does not require its members to understand and follow corporation law requirements.
An individual trustee structure does have its disadvantages:
- It may be costly and time-consuming to change the title of the SMSF’s assets if a member is added or removed. Depending on your location, your state government may require you to pay a fee for title changes. Similarly, you may need to pay financial institutions fees for amending titles of the assets within the SMSF.
- If there is a change of SMSF, you are required to re-register all assets held in the fund each time a member is added or removed. This can involve a lot of paperwork, time and costs.
- There is a risk your fund assets may be mixed with personal assets so it may be difficult to distinguish between personal and trust assets.
- May not offer the best asset protection like corporate trustees. If an SMSF is sued for debt, then the personal assets of individual trustees may be at risk.
- If a trustee breaches the law, a penalty may be imposed on each trustee of the fund. The ATO gave an example where if a trustee fails to prepare financial accounts and statements, then each trustee is liable to pay $1,800.
- If an individual trustee dies, then the fund will no longer continue to operate unless an appropriate succession plan has been prepared. If you do not have a succession plan in place, then the trust’s assets may need to be transferred to another entity. So there are administration processes that must be followed. It can get complicated, especially if property is involved because trustees are required to demonstrate to the revenue office no duty is payable.
There are many advantages and disadvantages to an individual trustee structure. Whatever decision you make can impact how your fund is managed and maintained. If you are struggling with deciding which structure suits your needs, then it is best to consult with LawPath’s experienced business lawyers.
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