Trustee structural issues

Individuals must choose between employing a corporate or individual trustee structure when running an SMSF. Smarter SMSF education and technical manager Tim Miller outlines the implications of each course of action.

SMSFs occupy a unique space in Australia’s retirement savings landscape, offering individuals maximum control over their retirement assets. At the heart of every SMSF lies the crucial role of the trustee. Trusteeship in SMSFs is a privilege, but it comes with legal responsibilities. This article explores the definition, structure, obligations and life-cycle transitions of SMSF trusteeship.

What is an SMSF trustee?

A trustee is a person or company legally responsible for the management of the SMSF and its compliance with superannuation and taxation laws. Under normal circumstances all members of an SMSF must be trustees or directors of the corporate trustee. This ensures that those who benefit from the fund are the same individuals who make its decisions, a key aspect of being truly selfmanaged. However, not all circumstances are normal, but this point will be examined in greater detail below.

Section 17A of the Superannuation Industry (Supervision) (SIS) Act outlines the rules with which an SMSF must comply, including that:

• it has a maximum of six members,

• all members must be trustees or directors of a corporate trustee,

• no member can be an employee of another member, unless they are relatives, and

• trustees cannot be remunerated for their duties, except in limited, regulated circumstances under section17B of the SIS Act.

According to the most recent ATO statistics as at 30 June 2024, 70 per cent of all SMSFs have a corporate trustee and up to 88 per cent of new fund registrations are choosing to adopt a corporate trustee over an individual trustee structure. This, of course, is one of the most important decisions both when setting up an SMSF but also in the context of maintaining the fund. It’s also a decision that will often be impacted by how many members the SMSF will service.

Single-member funds

When it comes to SMSFs, the trustee rules and requirements are the same for all funds with between two and six members. Where the rules differ is with regard to a single-member fund. These funds create a unique situation where the member must still be the trustee or a director of the corporate trustee, but is also bound by other legislative impositions and requirements.

If a single-member SMSF has individual trustees, then it must have a second individual trustee in addition to the member and this person cannot be the employer of the member unless they are related.

If a single-member fund has a corporate trustee, then the member can be the sole director of that company or the company can have one other director as long as the second director is not the employer of the member.

Individual vs corporate trustees

Given an SMSF can choose between two types of trustee structures, why would you choose one over the other?

The decision between one or the other is clearly a personal choice, but there are factors favouring a corporate trustee structure.

Individual trustees

When considering individual trustees, the choice is often summarised as cost versus administrative ease. It’s true there are fewer upfront costs to set up an SMSF with individual trustees and the structure will result in annual cost savings as well, albeit a special purpose company has a negligible annual fee. However, these costs can often pale into insignificance when contemplated against the time and possibly financial cost of removing and adding various individuals as membership changes over the course of a fund’s lifetime.

As highlighted below, there are numerous requirements a trustee must adhere to for regulatory purposes and one of those is to keep super fund assets separate from personal assets. Where individual trustees are listed on asset titles that don’t provide for the inclusion of the trust name, the situation can create problems insofar as having to constantly provide supporting evidence to fund auditors.

So some of the key issues for individual trustees are:

• minimum of two trustees,

• all members must also be trustees,

• cheaper as there are no company set-up costs,

• common for family-run funds, and

• greater administration requirements when members are added or depart.

Corporate trustees

When considering a corporate trustee, consistency springs to mind. To this end, a corporate structure enables the one trustee to be maintained throughout the lifetime of the fund. The only requirement is to remove and appoint directors to match the membership of the day.

It’s also more flexible for single-member funds, providing for the opportunity for sole directors, but also when one member dies in a two-member fund, the trusteeship can remain intact through the death benefit payment period and beyond.

So some of the key issues for a company acting as the trustee are:

• provides for single-member sole directors,

• all members are directors of the company,

• preferred for estate planning and limited liability, and

• more robust for long-term succession and compliance.

Penalty regime

One other relevant fact is that under the SMSF administrative penalty regime, the ATO can impose penalties on trustees for breaches of certain SIS provisions. Where a fund has individual trustees, the penalties will be imposed upon each trustee, which at the very least will translate into double the penalty rate. For corporate trustees there is just the one penalty to be met. For most trustees though the penalty regime should be the least significant consideration as compliance will ensure avoidance.

Legal responsibilities of trustees

As alluded to above, trustees are bound by certain regulatory requirements, referred to as covenants, which are outlined in section 52B of the SIS Act. These include duties to:

• act honestly in all matters concerning the fund,

• exercise care, skill and diligence,

• act in the best financial interests of beneficiaries,

• keep fund assets separate from personal assets,

• formulate and regularly review an investment strategy,

• manage reserves prudently (if applicable), and

• provide members with access to prescribed information.

These covenants are automatically included in every SMSF trust deed, even if not explicitly stated. It is important to note some of these covenants are directly linked to the operating standards of the fund as provided for by the SIS Regulations, which means the trustees can be penalised for not following them, specifically the need to separate personal and fund assets and the need to formulate and regularly review the fund’s investment strategy.

New trustees must sign an ATO trustee declaration within 21 days of appointment and retain it for at least 10 years, but in reality it’s a document that should be maintained for the term of their trusteeship. Failure to do so may attract administrative penalties.

Disqualification and restrictions

A person cannot be a trustee or director of a corporate trustee if they are a disqualified person. This includes individuals who:

• have been convicted of a dishonesty offence,

• are undischarged bankrupts or insolvent,

• have been disqualified by the ATO or a court, and

• are subject to civil penalty orders.

If a trustee becomes disqualified, they must be removed immediately from both membership and trustee/director roles. This also applies to companies if a disqualified person is a responsible officer.

Alternative trustees

There are several events that can either result in an alternative trustee being appointed or trigger a change in SMSF trusteeship. These include:

• death of a member,

• members being under a legal disability, and

• other events such as member relocation overseas.

Trusteeship must be managed carefully to ensure the SMSF continues to meet the definition under section 17A of the SIS Act. Documentation, timing and regulatory reporting all play critical roles in these events.

1. Death of a member

Upon a member’s death, the legal personal representative (LPR) may temporarily act as trustee while the death benefit is paid. This is permitted under section 17A(3)(a) of the SIS Act. It should be noted the legislation is permissive, not mandatory, and as such the trust deed will need to be consulted to determine how the death of a member is to be handled.

As the appointment of the LPR is restricted until the death benefit commences to be paid, such matters as the reversionary nature of a pension will determine whether the LPR can be appointed in the first place.

A fund has six months following the removal of a trustee to rectify the situation and retain its SMSF status.

2. Incapacity and enduring power of attorney

Under section 17A(3)(b) and (c) of the SIS Act, a person’s LPR, including someone holding an enduring power of attorney (EPOA) for a member, can replace that member as trustee or director. This allows the fund to retain its SMSF status even when the member is legally incapacitated. If that legal incapacity is due to age, that is, the individual is under 18, the member’s parent can act in their place.

3. Moving overseas

If all or most members move overseas, the fund risks failing the Australian superannuation fund definition, which is critical as an SMSF must remain a complying fund. In such cases, appointing a resident EPOA as trustee or director can be used to preserve residency status and comply with central management and control rules.

Key rules require that:

• the EPOA must be valid and enduring under state law,

• the member must resign as trustee or director if they have previously been a trustee and are able to legally resign,

• the EPOA holder is appointed in their own right and not as an agent, and

• alternative director arrangements are possible but must follow specific requirements.

Appointments and removals

When a new member joins or an existing member departs, the trustee structure must be adjusted accordingly. If a new trustee or director of a corporate trustee is appointed, it means:

• they must consent in writing,

• they must sign an ATO trustee declaration,

• they must not be disqualified persons, and

• directors of corporate trustees must have a director ID prior to appointment.

• Australian Securities and Investments Commission (ASIC) for corporate trustee changes within 28 days,

• ATO for any trustee/member changes within 28 days.

Process and documentation

Changing trustees involves multiple documents and steps. Common documentation includes:

• deed of appointment and/or removal of trustee,

• member resolutions,

• director consents and resignations,

• company constitution checks (for corporate trustees),

• EPOA (where applicable),

• ASIC Form 484 (for company changes), and

• ATO NAT 3036 form for SMSF updates.

A legal review of the documentation is highly recommended, especially for changes due to death, incapacity or residency concerns.

Tips for managing trustee changes

There are many standard actions to take when there is a change of SMSF trustees. These would include a review of the trust deed to determine whether it permits the proposed trustee structure.

Also, in the case of a corporate trustee, the company constitution needs to be checked to confirm the authority to appoint or remove directors.

All documentation, such as trustee declarations, consents and meeting minutes, must be retained for audit and ATO compliance.

Individuals involved should ensure the relevant reporting deadlines are met as delays can jeopardise compliance.

People faced with these circumstances should consult legal and tax professionals, especially when complex scenarios, such as member incapacity or blended families, are involved.

Being a trustee of an SMSF is not simply an administrative role; it is a legally enforceable fiduciary obligation. The decisions trustees make have long-lasting impacts on the retirement outcomes of fund members.

Understanding when and how trustee changes occur and executing them correctly is essential for preserving a fund’s complying status, avoiding penalties and ultimately protecting member benefits.