What is salary sacrifice into Super and how does it benefit you?
Choosing the Best Setup for your SMSF: Corporate vs. Individual
More Australians are switching to a self-managed super fund to give themselves greater control of their own financial future. As this trend grows, we get more questions from our clients about setting up their SMSF, buying insurance through their fund, and what options suit them best.
People are unsure whether they should set up their fund as an individual or corporate trustee. We’ve put together this short guide to help explain in layman’s terms the differences between the two types.
What is an Individual Trustee?
Individual trustees are not directors of a company. The SMSF fund with individual trustees is registered with the Australian Taxation Office (ATO) in the trustees’ names, rather than under a company name.
The ATO requires a fund set up with individual trustees must have four members or less, with all members trustees. No member can employ another member unless they are relatives. Trustees cannot be paid for their services or receive any added benefits for fulfilling their administrative and investment duties.
If you choose to be the sole member of your SMSF, you must appoint another person to act as co-trustee of the fund to assist with duties. This person cannot be your employer or employee, and you cannot pay them for their services.
As an individual trustee, you must register your fund’s assets under your own name. You are responsible for managing these assets and may be held personally liable for losses incurred.
What is a Corporate Trustee?
A corporate trustee is the director of a company under which a SMSF is registered. It doesn’t have to be a big company: many people create a $2 company (as the minimum investment you can make as company director to fund its operations), register it with the Australian Securities and Investment Commission (ASIC), and apply for an Australian Business Number (ABN) and Australian Company Number (ACN).
You’ll have to appoint yourself and your other SMSF members as directors of the company and register these details with ASIC. Your company doesn’t have to be operational, but it can act as a corporate trustee of your SMSF.
All members of a corporate SMSF must be directors of the company, and no member can employ another unless they are related.
But all assets of the fund are registered with the ATO under the company’s name, so each member cannot be held personally liable for losses incurred. If you plan on being the only member of your fund, you won’t need to appoint anyone else to help manage your fund, but you can appoint a non-member as director of your company.
Setting up a fund with a corporate trustee is more time-consuming and more expensive because you must register with both the ATO and ASIC, but if the structure is right for your needs, it can have significant benefits in the long run.
What are the main administrative differences?
| – | Individual | Corporate |
|---|---|---|
| Establishment costs | Fewer costs involved | More expensive due to the costs of setting up a company and registering with ASIC |
| Single member funds | Even if you are the only member of your fund, you must appoint another person to act as a trustee as you cannot administer a non-corporate SMSF as the sole trustee. This can affect confidentiality | If you are the only member of a corporate SMSF you may appoint yourself sole director of the fund, or have a second non-member director |
| Borrowing to purchase property | More difficult to borrow money as many banks will not lend to this structure | Easier to borrow |
| Liability | Each member is personally liable for losses incurred due to misconduct. Each member’s personal assets can be subject to liability claims | Corporate trustees have limited liability; in most cases their personal assets cannot be accessed in a liability claim |
| Changing members | If a member leaves the fund or passes away, registration must be updated for each asset. A new member may need join the SMSF. This can be a costly and time consuming process | No need to change the registration of a fund’s assets if a member dies or leaves the fund. If a director dies, there is no need to appoint a new one |
| Governing rules | Trustees must follow rules set out by the fund’s trust deed and Australian Super Laws | Trustees must follow the rules set out by the fund’s trust deed and Australian Super Laws, as well as the company’s constitution and the Corporations Act 2001 |
| Reporting | You must appoint an independent auditor to audit the fund each year, as well as lodge a return and pay a supervisory fee to the ATO annually | You must appoint an independent auditor to audit the fund each year, as well as lodge a return and pay a supervisory fee to the ATO annually |
| Paying benefits to members | You can only pay benefits to members as a lump sum if the trust deed permits you to do so | Benefits can be paid as a lump sum or a gradual pension |
The above table was adapted from AMP SMSF Solutions guidebook “Is an individual or corporate trustee right for me”. Read the full guide here.
Which is best for me?
There’s no sure-fire way of knowing which structure to choose, so we recommend you consult a financial adviser and your planned fund members before setting up the fund. If you want to be the sole member of your fund, or you and your spouse would like to set one up together, a corporate trustee may be a better option. But this always depends on individual circumstances and you will need to consider your options carefully.
The ATO and ASIC are great places to find resources on setting up and managing your self-managed super fund. Wealth Smart insurance provider AMP provides a wealth of easy-to-understand resources. But the best place to turn for advice will always be a qualified and trusted financial adviser who can assess your individual needs and help you make the right decision. It’s best you don’t set up an SMSF without the help and guidance of an independent professional.
