SMSF Trustees: Why should I use a corporate trustee?

There are two alternative approaches to appointing a trustee for a Self-Managed Superannuation Fund. The first is to appoint each member of the fund to also act as individual trustees of the fund. The second approach is to appoint a company as trustee. This requires each member to also be a director of the corporate trustee.

There are numerous advantages to having a corporate trustee rather than appointing SMSF members as individual trustees. These advantages include perpetual succession, protection of members and assets, administrative efficiency, increased estate planning flexibility and greater flexibility to pay benefits as lump sums or pensions.  

In order to explore the many benefits and efficiencies of using a corporate trustee, we first consider the relationship between a corporate trustee and its SMSF. We then outline what we consider to be the top 4 of legal, financial and administrative advantages.

First, what is the relationship between a corporate trustee and the SMSF?

As a starting point, it is a useful reminder that a corporate trustee, like an individual trustee, would be the legal owner of the SMSF assets and holds assets in its own name (such as shares, property and cash) as trustee for the SMSF. The SMSF is the beneficial holder of the assets while the individuals who benefit from those assets are the members of the SMSF.

As the legal holder of the SMSF assets, a corporate trustee can control how assets are distributed to the beneficiaries of the SMSF in accordance with the trust deed establishing the SMSF.

Superannuation law in Australia requires all members of the SMSF to be trustees of the SMSF or otherwise directors of a corporate trustee (with some limited exceptions to this rule). Therefore members who are also individual trustees would hold SMSF assets in their own name. Conversely, members who serve as directors of the corporate trustee do not hold assets in their personal names; instead, the assets are held in the name of the corporate trustee.

The relationships described above are fundamental to discerning some of the benefits of using a corporate trustee versus an individual trustee.

What are the benefits?

Succession planning

Having a corporate trustee for your SMSF is particularly useful in the event a member of an SMSF passes away. Where that individual is an individual trustee of the SMSF, any assets held by that individual as trustee for the SMSF would need to be transferred into another name or entity, requiring updated ownership documents amongst other things. This can lead to significant administrative burdens and paperwork and can get especially complex where the SMSF holds real estate or shareholdings across multiple companies, or has borrowing arrangements in place. 

Moreover, given the rule that a sole member SMSF cannot have a sole individual trustee, where an SMSF has two members and one passes, the SMSFs structure must be addressed (by appointing an additional individual trustee, or a replacement corporate trustee) as it is a requirement under superannuation law to have two individual trustees. These circumstances may arise where the two members are a couple and act as two individual trustees.

Unlike individuals, a corporate trustee will endure and a member’s passing will only result in their removal as a director of the corporate trustee. As the company remains as the same entity, the name in which any SMSF assets are held does not change, ensuring uninterrupted succession in two ways:

• the legal owner of the assets does not change, therefore avoiding the administrative burden associated with transferring title of the SMSF assets; and
• a sole director corporate trustee for a sole member SMSF is permitted under superannuation law and no additional appointments would be required.

A corporate trustee also benefits from being governed by a company constitution which often includes provisions contemplating the succession of directors.  

Limited recourse borrowing

Limited Recourse Borrowing Arrangements (LRBA) are a mechanism SMSFs can use to make investments and are permitted under superannuation law provided certain conditions are met. Trustees of SMSFs are otherwise generally restricted from borrowing money to make investments.

An LRBA involves a third-party lender (such as a bank) lending money to the trustee of the SMSF to purchase specific and identifiable assets. These assets would be held in a separate trust to the SMSF and any returns accrued by those assets would be directed to the SMSF trustee. The lender’s recourse in the event of default is limited to the assets held by the separate trust, funded by the borrowed money.

The use of a corporate trustee is relevant to a LRBA is because banks tend to insist that the trustee of the SMSF borrowing funds is a corporate trustee rather than an individual trustee. In that regard, having individual trustees may preclude the ability of the SMSF to make investments using funds borrowed from third-parties.

The reasons banks require corporate trustees when lending to SMSFs include avoiding the complexities which arise as referred to above. 

Lower administrative penalties

Under superannuation law, administrative penalties can be imposed on the trustee for any contravention of superannuation rules that occur. The way these penalties apply is substantially different depending on whether the trustee is a corporate trustee or an individual.

For a corporate trustee, administrative penalties are typically incurred per contravention and are directed to the one entity. Directors are jointly and severally liable to pay any penalty, meaning that the cost would be shared. Penalties against individual trustees, on the other hand, apply per individual trustee. This means that a penalty would be imposed on each individual trustee instead of the penalty spread out across directors of one corporate trustee. 

In the 2024 financial year, the maximum penalty fee is $18,500 for each trustee. 

Asset protection

Asset protection is fundamental tenet of legal planning and corporate law – if a company does not have the assets or money to satisfy a debt or liability, a suing party cannot easily access the personal assets of the company’s directors in most circumstances. The same applies for corporate trustees of an SMSF where the trustee may be liable for an amount which exceeds the assets held by the SMSF. 

As a general position, SMSFs operate in a low risk environment in that they cannot engage in trade and commerce and because of the limitations on SMSFs borrowing money. That said, they are not risk free, and accordingly, one should consider whether it is preferable to act as a personal trustee or a corporate trustee. Generally the trustee of the SMSF is personally liable for the debts or other liabilities of the SMSF. An individual trustee would be exposed directly to that risk.

SMSF trustees (as with all trustees) are entitled to meet those liabilities out of the SMSF assets – this is known as a trustee indemnity. However, where any debt or liability of the SMSF exceeds the value of the SMSF assets, the trustee must still meet those liabilities form its own assets.

The potential consequences are vastly different where a party taking action in respect of liability incurred by the SMSF has to go after a corporate trustee where there is not sufficient SMSF assets to meet the liability. By virtue of a corporate trustee being a distinct and separate legal entity, acting as a director of a corporate trustee is a safer position to be in compared to acting as an individual trustee. With a corporate trustee, the liability will generally be limited to the assets held by the SMSF, and where they are insufficient then those assets of the corporate trustee (which will generally be nil).

How do I establish a corporate trustee for my SMSF?

Cleardocs offers a SMSF Trustee Bundle product for a full set of documents for your SMSF set up and Company Registration for $950. This can be purchased from Cleardocs’ website here.

More information from Maddocks

For more information, contact Maddocks on (03) 9288 3555 and ask to speak to a member of the Commercial Practice Group.

More Cleardocs information on related topics

You can read earlier ClearLaw articles on a range of matters, such as:

• Why Do You Need To Be Careful When Adding Or Removing A Beneficiary In Your Discretionary Trust?
• NSW Supreme Court Dismisses Existence Of Trust Relationship In Project Development Arrangement
• The Clock Is Ticking: Apply Now For Your Director ID!

Order related document packages

• SMSF Trustee Bundle
• SMSF Investment Strategy for 12 Months Unlimited Use