If your SMSF has a corporate trustee then you and your partner must each be a director of the company and the company cannot have any other directors. Similarly, with individual trustees you and you husband must be the only trustees.
The decision as to whether your SMSF has a corporate or individual trustees is one that you need to take at the time that you set up the fund. While it is possible to change the trustee structure later, it is not a simple or cost-free exercise to do so.
Like that of most professional advisers, I am strongly of the view that an SMSF should have a corporate trustee.
The only real advantage of individual trustees is that the fund is cheaper to establish and operate as you do not need to incorporate and maintain a trustee company. This is the main reason that roughly 70 per cent of SMSFs have individual trustees.
However, the initial cost savings of using individual trustees can, over the life of the fund, ultimately prove to be a false economy for the reasons set out below.
- Succession flexibility
Unlike people, companies do not die and thus the death of a member in a fund with a corporate trustee causes no immediate problems. However, when an individual trustee dies action needs to be taken to ensure that the SMSF does not lose its tax concessional status. There have been a number of court cases in recent years involving disputes arising from the death of a member, which would have been less likely to arise if a corporate trustee was used.
Having a corporate trustee also provides a better structure for handling member incapacity and divorce situations.
- Ease of administration
The admission of new members to the fund (such as your children) and the acquisition and disposal of assets are much simpler with a corporate trustee. The legal ownership of the fund's assets do not need to be changed every time that a member joins or leaves the fund. It is also easier to show that the fund remains an Australian fund if you ever moved overseas for a period of time.
If you intend that your SMSF will use a limited recourse borrowing arrangement then it is almost certain that the lending bank will require the fund to have a corporate trustee.
- Sole member status
If you are individual trustees and your marriage ends or one of you dies, then you will not be able to continue the trusteeship of the SMSF by yourself. Rather you will need to find an additional trustee for the fund. With a corporate trustee you can continue on as sole director of the company.
- Asset protection
Companies have limited liability and provide greater protection in cases of the SMSF becoming insolvent. Each individual trustee of an SMSF is joint and severally liable for the liabilities of the fund – but have a right of indemnity our of fund assets. Directors of a company are generally not personally liable for the debts of the company.
- Lower penalties
Under the new penalty regime for SMSFs, only one penalty is applied to a fund with a corporate trustee. However, each individual trustee is penalised personally, which would double the penalty in your case.
- Benefit flexibility
Funds with corporate trustees can pay benefits in either lump sum or pension form. However, a fund with individual trustees must have a primary purpose of paying pensions, which makes it more difficult to convert a pension to a lump sum at a later time.
One final point: although any form of company may act as trustee of an SMSF, I strongly suggest that a sole purpose company is used. This attracts a lower annual ASIC fee and has the advantage of keeping the affairs of your SMSF separate from your other business and family interests.
David Court is a partner of Holley Nethercote commercial and financial services lawyers.