An SMSF may be composed of individual trustees or a corporate trustee. The main difference is that the former requires each member to serve as a trustee and be equally responsible for the trust. The latter creates a corporate entity that will serve as the sole trustee and participants only serve as directors and members of that company.
Both have merits, but once an SMSF has been registered, the only way to change the structure is to start over with a new fund.
Here’s a comparison between the two trust structures.
It is important to note that both SMSF structures may only involve a maximum of four people, but the minimum number of participants and their status in the SMSF depends on its structure. An important thing to remember for all structures is that two members may not have an employer-employee relationship unless they are legally related.
Both conditions for corporate and individual SMSF types hold true unless they are structured as a single-member fund.
Corporate SMSFs are composed of one to four participants and is registered as a company. All participants must serve as directors and members of the fund.
Individual SMSFs require the involvement of two to four participants who serve as trustees and members of their SMSF.
Single-member funds are SMSFs composed of two participants but with only one person serving as the member.
Corporate SMSFs allow for single-member funds to have one or two participants, provided they follow either of the two arrangements:
- one director and one member; or,
- two directors with only one of them serving as a member.
Individual SMSFs, on the other hand, requires a minimum of two participants to act as trustees even if there is only one member. Both trustees must also be relatives.
Operating an SMSF can be costly, but some recurring expenses that trustees pay could depend on its structure.
Corporate SMSFs have higher expenses upon establishment since the Australian Securities and Investments Commission (ASIC) charges fees for the first registration. Once registered, corporate SMSFs must also pay for annual review fees to ensure that it may continue to operate. This cost would depend on the functions of the SMSF.
Individual SMSFs cost less to establish since there are no ASIC fees to pay upon registration. Trustees only need to worry about smaller administrative and establishment fees but this is where the low fees end.
The annual operational cost of an SMSF varies regardless of structure and depends on the fund’s balance. The average operating costs of maintaining an SMSF shaves off somewhere between 12.05 per cent for fund balances up to $50,000 and 0.63 per cent for balances greater than $2 million.
SMSF trustees would have to consider additional costs if they plan to employ professionals for investment advice and services. There are also additional expenses when the trust membership changes.
Charges and fines
Payment of fines works differently when issues arise. If the trust is found guilty of breaching regulations, they must pay fines according to the number of trustees involved.
For example, if an SMSF is fined $1,000 for failure to submit an important document, the Australian Taxation Office (ATO) penalises the trust in the following manner:
A corporate SMSF would be charged as one entity even if there are four participants. This means a $1,000 fine would only be charged once because the corporation acts as the sole trustee.
In the case of Individual SMSFs, each trustee will be fined $1,000. This totals to a $4,000 fine for an individual SMSF with four trustees.
Trustees may decide to purchase assets for the fund. However, issues may arise when it comes to accounting for them since regulations require fund assets to be under the name of all current trustees.
If an SMSF corporation decides to purchase an asset, it would become the property of the corporation and any change in membership does not affect the status of the property. The corporate SMSF only needs to inform both the ASIC and ATO that fund membership has changed.
In the case of individual SMSFs, ownership of fund assets is a cause for concern when membership changes.
Any change in membership means changing the titles of all SMSF assets to update ownership. Each change has an accompanying fee so it will take up a lot of time and money just to keep up with regulations. Trustees could face hefty fines if they fail to update asset titles.
Membership change and succession
Trustees could become unable to perform their duties and responsibilities due to medical issues, disability or even death.
Corporate SMSFs have a higher probability of continued operation when a change in membership occurs because one member’s position and capacity would not affect the company’s assets.
Individual SMSFs would have a harder time dealing with a member’s incapacity or death because trustees must attend to changes in all asset titles first—unless a proper and legal succession plan is in place.
A corporate SMSF may seem like the better deal in terms of addressing unforeseen circumstances, but an individual SMSF could still be a good choice, depending on the trustee’s circumstances. It is best to seek professional advice before deciding on which trust structure is best for your SMSF.
This information has been sourced from the Australian Taxation Office.