A fundamental question for intending SMSF members is whether to have a corporate trustee or individual trustees for their new fund.
More than 80 per cent of new SMSFs established in 2016-17 had a corporate trustee whereas 57 per cent of all SMSFs had a corporate trustee as at June last year, according to the latest tax office data.
Individual trustee arrangements – with all members individually being trustees – are typically less costly and simpler to put in place when a fund is being setup. Yet a corporate trustee potentially provides greater flexibility for the future.
These tax office statistics suggest that the majority of long-established SMSFs were setup with individual trustees. However, most members of newer funds are recognising the potential long-term attributes of a corporate trustee.
It could be useful to take advice from an SMSF specialist adviser about whether to have individual trustees or a corporate trustee for your fund. It is critical that would-be SMSF members understand the differences between the two.
Under superannuation law, all members of an SMSF must be either individual trustees or directors of a corporate trustee of the fund. An SMSF with individual trustees must have at least two individual trustees yet a corporate trustee can have only one director.
Assets of an SMSF with individual trustees are held in the names of individual members as trustees for the fund. If the membership of an SMSF with individual trustees changes – perhaps following death, marriage breakdown or the addition of a new member such as an adult child – the names on the funds’ ownership documents must also change. This can be costly and time-consuming.
By contrast, with a corporate trustee, assets are held in the name of a company as trustee. If trustee directors change, the assets remain in the name of the same company.
If a fund has, say, two individual trustees and one dies, the fund must appoint another trustee in order to continue as an SMSF. This is because of the requirement that a fund must have at least two individual trustees. Yet if an SMSF has a corporate trustee, a deceased trustee director may not have to be replaced because a corporate trustee can have a single director.
Critically, a corporate trustee will continue to control an SMSF and its assets after the death or incapacity of a member. This is a significant succession-planning issue for an SMSF as well as for the estate-planning of members.
Further reading: The tax office, as SMSF regulator, recently updated this article about choosing individual trustees or a corporate trustee. This includes a useful video.