There are many important decisions to be made when you own an SMSF, including who acts as the trustee of your fund. As you may expect, there are some strict rules about who can become an SMSF trustee and their responsibilities.
If you’re unclear on the rules and responsibilities of trustees, we are here to explore the duties of a trustee in Australia. Such as, trustee responsibilities, trustee obligations, who can be a trustee, and the different structures you should consider for your self-managed super fund.
Who can I nominate as the trustee of my SMSF?
The role of a trustee is super important (pardon the pun). It’s a critical role, as the trustee is responsible for making all the investment choices and decisions for the fund; as such, you can’t just nominate Joe Blo from down the road as the trustee of your SMSF.
Firstly, you need to decide whether your SMSF is going to have an individual or corporate trustee. There are quite a few differences between the two, including member and trustee responsibilities, requirements, cost, ownership of fund assets, the separation of assets, and penalties.
Both options have pros and cons depending on your particular circumstance, so it’s prudent to understand the differences between them.
Individual SMSF Trustee
The important aspects of having an individual trustee are:
- The SMSF has to have between two and six members.
- Every member of the SMSF must be a trustee of the fund.
- This rule is different if there is only one member of the SMSF (a ‘single member fund’). For single-member funds, there must be two trustees, and one must be a fund member.
- You cannot nominate a trustee who is not a member of the fund.
- For single-member funds, the fund member can only be an employee of the second trustee if they are related.
- In some states and territories, laws state that trusts (which SMSFs are, technically) are limited to less than six trustees. This may become important if you have a six-member fund and wish to elect an individual trustee structure as it would disallow every member of the fund to be a trustee.
Corporate Trustee
Holding a corporate trustee of your SMSF differs from an individual trustee structure in that:
- A corporate trustee is essentially a company listed as the trustee of your SMSF, not the individuals themselves.
- Each member of the SMSF must be a director of the corporate trustee, and likewise, each director of the corporate trustee must be a member of the fund.
Who can’t be an individual trustee or director of the corporate trustee of an SMSF?
Given the essential role of fund trusteeship, there are some limitations on who can be elected as an individual trustee or director of the corporate trustee of SMSFs.
Even if the trustee satisfies the conditions listed above, people who cannot take on the role of trustee include anyone who:
- Has been disqualified by the ATO from acting as the trustee of a super fund.
- Holds a conviction of an offense that involves dishonest conduct.
- Has been or is subject to a civil penalty under the legislation that governs superannuation.
- Is either undischarged bankrupt or has been classified as insolvent.
What are other differences between individual and corporate trustee structures?
Cost
Structure funds are not required to pay any ASIC fees. Therefore, this is a lower upfront cost option compared to Corporate Trustee structure (ASIC charges a fee to register a corporate trustee for the first time). The company that acts as trustee under a corporate structure is also required to pay an annual fee to ASIC. (If the company’s existence is purely to act as trustee for the SMSF, then this fee is fairly small).
While the upfront costs of establishing an individual trustee structure are less than the alternative, additional costs could be involved if a new member is added to the fund or a fund member passes away. In one of those instances, there is typically a much greater level of administration required when the fund has trustees, which will likely incur the associated fees by the fund administrator (if the SMSF has one). In addition, state government authorities may charge a fee to change the title of assets, as may financial institutions. The increased administration compared to a corporate trustee is due to the requirement that all the fund assets are in the name of all the trustees (so everything needs to be changed over).
With a corporate structure, the company owns the assets. Therefore, if a member dies or is introduced to the SMSF, there is no change in ownership and, therefore, not as much additional administration is required or changes of title needed. In fact, registering and recording assets (particularly for changes in membership) can be simpler with a corporate trustee. The only requirement is that the fund must notify ASIC of a change in director of the corporate trustee and complete the relevant administration to change these details under the A.C.N of the company.
Asset Ownership & Separation
As we noted above, when using a corporate trustee, the assets of the SMSF are owned by the company. Under an individual structure, the assets of the SMSF must be owned by all SMSF members.
Keeping the assets separated between the fund and its members and trustees is relatively straightforward. Fund assets for trustee-run SMSFs need to be in the fund’s name and can’t be combined with the trustees’ personal assets. Similarly, fund assets under an SMSF with a corporate trustee must be in the fund’s name and can’t be combined with the company director’s personal assets.
The biggest difference here is that a corporate trustee offers a greater level of protection in the event that you are sued or go bankrupt. The protection comes from the company having limited liability — in other words, the company is a separate legal entity. This means that your superannuation assets are out of reach to the person suing you.
Penalties
When you’re considering which trustee type to go with, financial penalties may not even cross your mind. SMSF trustees are legally obliged to make sure that the SMSF remains compliant with Australia’s superannuation legislation.
With a corporate trustee, the financial penalty for breaching super laws may be less than with an individual trustee. How? Because the penalties are levied for each individual trustee, whereas in the instance of a corporate trustee, it’s levied to the company.
What this means for you is that if every trustee is liable for, say, ten penalty units (as an example), where each penalty unit is $222. This results in each trustee being liable to pay a $2,200 penalty. If you have six trustees, the SMSF is required to pay out a total of $13,200.
For the same breach, a corporate trustee would incur the same amount of penalty units, at the same rate, but because there’s only one company (not 6), the total penalty incurred by the SMSF would be $2,200.
Succession Planning
Difficulties can arise if you hold an SMSF with individual trustees when one of the members passes away. This is due to considerable administration required due to there being a change of trustee. A corporate structure offers a better level of flexibility in this case as the trustee does not change on the death of a member.
What are the responsibilities of SMSF trustees?
The overarching responsibility of all SMSF trustees is to ensure that the self-managed super fund remains compliant with the legislation that governs superannuation in Australia. No wonder there are so many rules around who you can nominate as a trustee. On top of that, a corporate trustee also needs to ensure compliance with all of the laws that apply to companies, too!
All trustees must sign and return a trustee declaration to the ATO within 21 days of being appointed as a trustee of an SMSF. The SMSF Trustee Declaration lists all of the various responsibilities around the sole purpose test, trustee duties, accepting contributions and paying benefits, investment restrictions and fund administration.
An overview of some of the different duties of trustees is below:
Sole Purpose Test
As the trustee of an SMSF, you need to ensure that the super fund passes the sole purpose test. This test ensures that the fund operates purely for the sole purpose of providing retirement benefits to the members.
Developing an investment strategy
During the SMSF establishment, it’s the trustee’s duty to set up a legally documented investment strategy. The investment strategy needs to follow the rules outlined in the SMSF trust deed and needs to be reviewed regularly. This ensures that the investment strategy can continue to reflect the needs of the SMSF members and their unique circumstances.
Insurance Considerations
It’s the trustee’s responsibility to make sure that a part of the investment strategy for the SMSF includes whether to take out personal insurance (such as life insurance) for its members.
Superannuation Contributions and Payments
When it comes to accepting superannuation contributions and ensuring payments made out of the fund are in line with the law, this comes down to — you guessed it — the SMSF trustee! This is particularly important as there can be serious penalties for breaching a superannuation condition of release or exceeding the contributions cap limits.
Keeping an eye on the Total Super Balance and Transfer Cap Limits
As well as keeping tabs on what’s coming in and going out of the SMSF, the trustees need to monitor the Total Super Balance (TSB) and Transfer Balance Caps (TBC) of its members.
Paperwork, Paperwork, Paperwork
Okay, so the Declaration doesn’t have those words exactly, but a trustee needs to make sure they’ve completed all the administrative requirements of running an SMSF (and there’s a fair bit!). The administration involved can include appointing an auditor, maintaining records, paying ATO levies and event-based reporting. The trustee does have the option to outsource these tasks to an SMSF administrator, which can be a cost-effective and time-saving solution. We can put you in touch with some great SMSF administrators.
Are individual or corporate trustees my only SMSF trustee option?
There is one wildcard in the SMSF trustee space — a Small APRA fund, also referred to as an SAF, which is managed by a professional trustee. If you love the control and flexibility of an SMSF but get nervous at the volume of trustee responsibilities, an SAF offers you the same freedom and flexibility as a self-managed super fund but takes care of the trustee responsibilities for you.
The main difference between an SAF and an SMSF is that an SAF is regulated under APRA, not the ATO like SMSFs are. This means there are some different rules. An SAF may appeal to you if you want the benefits of an SMSF but you have a trustee who may be ineligible or disqualified, such as someone who is insolvent, bankrupt or lives overseas.
Bear in mind though that the professional trustee will come at a cost that SMSFs do not incur and they may impose restrictions on your tailored investment strategy.
Top Tips to consider when choosing an SMSF trustee
- 1. You can achieve a better level of reporting transparency by establishing a company solely for the purpose of being the SMSF trustee. If you use an existing company with existing assets, this can complicate matters.
- 2. The ongoing ASIC fee is also cheaper for the company when it is only used as a trustee vehicle.
- 3. If you’re considering a Limited Recourse Borrowing Arrangement (LRBA), it can be advantageous to utilise a corporate trustee structure as some lenders prefer this structure. There are some additional legal hurdles to contend with when using an individual trustee structure and applying for LRBAs.
- 4. Make sure to have the trustee include the ability to enter into an LRBA in your SMSF Trust Deed.
If you’re feeling overwhelmed or would like some assistance in appointing or changing the trustees of your self managed super fund, SMSF Loan Experts can ensure your super fund is set up correctly and compliantly. Not only do we help with the set-up of your fund, but if you are purchasing commercial or residential property through your SMSF, we can even organise to have your loan pre-approved before your super fund has been established. Contact us today to find out how we can help make your SMSF life just that little bit easier.
