A vital SMSF question: A corporate trustee or individual trustees?

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A vital SMSF question: A corporate trustee or individual trustees?

A vital SMSF questionA self-managed super statistic that doesn’t seem to change much over the years is the strong preference of new SMSFs for individual trustees rather than a corporate trustee.

The latest-available tax office statistics on SMSF trustee arrangements show that 93 per cent of SMSFs established in 2015-16 had individual trustees – a percentage that has remained more or less static in recent years. Yet 77 per cent of all SMSFs in existence at June 2016 had individual trustees – again a percentage that has remained rather static.

Looking at this from another way, a third of all SMSFs have corporate trustees against just 7 per cent for new SMSFs.

There are perhaps some straightforward explanations for these trustee differences between fledgling and established self-managed funds.

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 the statistics suggest that as time goes on, many SMSF members either recognise the potential greater flexibility of having a corporate trustee or a change in their circumstances necessitates a switch to a corporate trustee.

Depending upon their circumstances, some informed would-be SMSF members may decide to bite the cost-and-convenience bullet early and go with a corporate trustee from the beginning. It could be worthwhile gaining advice about the issue from an SMSF specialist.

Let’s run through some of the basic rules regarding trustees for self-managed, which should be understood by all intending and existing SMSF members.

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.

An SMSF with individual trustees are held in the names of individual members as trustees. 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.

In short, a corporate trustee will continue to control an SMSF and its assets after the death or incapacity of a member. This is a key estate-planning consideration.

The decision about whether to have a corporate trustee or individual trustees could have financial and personal implications for as long as an SMSF remains in existence, including when a member leaves the fund and/or a new member joins.

Unfortunately, some SMSF members may not understand the differences between having individual trustees or a corporate trustee until it is too late.

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Written by Robin Bowerman, Head of Market Strategy and Communications at Vanguard.

Reproduced with permission of Vanguard Investments Australia Ltd Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) is the product issuer. We have not taken yours and your clients’ circumstances into account when preparing this material so it may not be applicable to the particular situation you are considering. You should consider your circumstances and our Product Disclosure Statement (PDS) or Prospectus before making any investment decision. You can access our PDS or Prospectus online or by calling us. This material was prepared in good faith and we accept no liability for any errors or omissions. Past performance is not an indication of future performance.

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