What is a Self-Managed Superannuation Fund (SMSF)?
A Self-Managed Superannuation Fund (SMSF) is a type of superannuation structure that allows members to control and manage their own funds. Unlike other superannuation funds, members have autonomy over the choice of investments they can make, subject to the relevant superannuation laws.
A SMSF must comply with the requirements of the Superannuation Industry (Supervision) Act 1993 (Cth) and relevant tax laws. Compliance is necessary to take advantage of available income and capital gains tax concessions which have been implemented by the Government to encourage people to save for their retirement.
SMSF & Trust Structures
The activities of an SMSF must be conducted through a trustee because the fund itself is not a separate legal entity. Each member of an SMSF must also act in the capacity of trustee whether this be as an individual or as a director of a corporate entity.
It is important to consider the trustee structure of an SMSF from the outset. Whilst changing the trustee structure at a later stage is possible, additional administration and costs are involved.
Initially, an individual trustee structure costs less and there are fewer reporting requirements, such as those of a company under the Corporations Act 2001. However, there are benefits of having a corporate trustee for your SMSF which in the long term, may outweigh the associated costs and administration. Given that superannuation is a long-term savings strategy, these benefits should be considered.
Protection of members
Assets held in an SMSF for which a corporate entity is trustee, are held in the name of that company. Companies have limited liability and directors are generally not personally liable for company debts.
This provides greater protection should the trustee company be sued or the SMSF become insolvent. The distinction between assets held by the corporate trustee and those held personally by fund members also gives greater protection.
Having a corporate trustee further protects members if monetary penalties are levied against the fund for certain breaches of the superannuation rules. If a breach occurs and the trustee is a corporate entity, then the penalty is charged against the trustee company only. Such penalties would otherwise be raised against each and every SMSF member acting in their individual capacity as trustee.
Administration – changing fund members / changing assets
The appointment of a corporate trustee allows for easier administration when changes in the structure and membership of the SMSF occur. Such changes might be brought about by the addition of children as members to the fund, the death of a fund member or divorce or separation of fund members.
Because fund assets are held in the name of the corporate entity rather than individually, it is unnecessary to transfer the ownership or registration details for each asset held. This results in less administration and can save costs.
Holding assets in the name of a corporate entity also provides clarity as to ownership between the SMSF assets and those owned privately by members or through their business entities. This structure assists in complying with legislation which requires that fund assets not be intermingled with a member’s personal assets.
If a single-member fund has a corporate trustee the fund member may be the sole director of that corporate entity. If a corporate entity is not appointed, then the rules require that another person (in addition to the sole member) be appointed trustee. This may not be desirable for the fund member who wishes to have autonomy over his or her own SMSF.
A further issue with sole member funds is that the death or discontinuance of a trustee means that the fund cannot continue as a compliant fund unless an additional trustee is appointed.
Limited recourse borrowing
Over recent years, legislation has been introduced allowing SMSFs to borrow funds to purchase certain ‘acquirable assets’ provided the borrowing arrangements are in a prescribed form and satisfy strict requirements. An acquirable asset includes real estate for investment purposes.
The asset must be held on trust and the lender’s rights against the SMSF trustee for default under the loan are limited. Due to the stringent requirements, most lenders under these arrangements insist that the SMSF trustee is a separate corporate entity.
Establishing a corporate entity as trustee for your SMSF is worth considering. The process is relatively straight-forward however certain requirements must be met for the SMSF to be considered a complying fund. It is also recommended that a sole purpose company be used as the corporate trustee which results in lower ASIC fees and assists in separating the affairs of the fund and the members’ other activities.
Funds must register with the Australian Taxation Office for an Australian Business Number (ABN).