If you’re considering setting up your own SMSF in the near future, it’s important to get the structure right for tax and financial planning purposes.
Many people set up their SMSF to facilitate investing in property, however there are some tax risks, costs and compliance requirements that are often overlooked when setting up via an online or administration firm.
One of the questions we often get is whether it is better to setup with individual trustees or establish a company with a corporate trustee. Both have their merits, cost benefits and compliance considerations, as well as potential tax implications.
What’s important to remember is that being a trustee for an SMSF is an important role and you are responsible for ongoing operations and compliance for your SMSF.
So which is best for you?
In an individual trustee structure, each member of the fund is a trustee. It’s a legislative requirement that where an SMSF has individual trustees, there must be a minimum of two and a maximum of four trustees responsible for running the SMSF.
Almost anyone over 18 years of age can be a trustee, including a spouse, your children (if over 18) or friends.
The main benefit of having individual trustees is that administrative costs and upfront establishment costs are generally less than if your SMSF is set up under a corporate structure. But there are some disadvantages of an individual trustee structure, including:
- Administrative time and costs in appointing and managing individual members and trustees
- Assets held within an individual trustee structure may be subject to liability issues if the SMSF defaults on any investment repayments – a risk that is amplified if the SMSF has investment properties where there are also tenant related risks
Set up similarly to a company, corporate trustees offer longer-term benefit and financial protection that an individual trustees don’t.
A corporate trustee provides the benefit of limited liability so that in the event of the trust incurring any liability, individual directors are unlikely to be held personally liable (though there are exceptional circumstances).
Other advantages include:
- Assets in the trust are clearly separate from personal assets, which provides some level of protection in the event of unexpected liability.
- In the event that an SMSF member dies, the company can continue to function with a relatively straightforward process. Compared to individual trustees, this can be more complex, time-consuming and expensive because of the administrative requirements.
- If the SMSF buys property and enters into a limited recourse loan agreement, then the SMSF is more likely to lend to a corporate trustee to purchase the property.
While there are a lot of advantages, corporate trustees in an SMSF generally cost more upfront, incur annual ASIC fees and ongoing compliance costs.
There are also rules that directors must comply to such as a company constitution and articles.
In weighing up the pros and cons of individual trustees versus corporate trustees, an accountant can help you to look at both in the context of your current circumstances.
The primary benefit of having corporate trustees is protecting your assets and limiting your losses, while enabling members to leverage the SMSF for investment in assets..
For example, if you are likely to be exposed to higher risks in your business, then considering how you’ll protect your SMSF assets becomes more important.
Your accountant can work with you to understand what those risks are and how your tax situation may be influenced by your SMSF decisions.
If you’re intending to set up your SMSF, please contact us on 9957 4033 for a confidential discussion about your current tax position and the issues you need to address before deciding on individual or corporate trustees.
Last updated October 2014. This factsheet is provided for information purposes only and is correct at the time of publishing. It should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.