Can a Single Person Have an SMSF?
An SMSF can be set up with a single person, but there are specific requirements for the trustee structure. As all of our SMSF Setups are done with corporate trustees it is not an issue for our clients wanting a single member fund however, for clients considering using individual trustees then it presents more of an issue. Keep in mind that an SMSF is a form of trust and is thus not a legal entity in its own right, so it must have either a minimum of two individual trustees or a corporate trustee.
Are all members of an SMSF required to be a trustee?
For SMSFs with 2 or more members, each member must also be a trustee or a director of the corporate trustee (except in limited circumstances). However, if a single-member fund has 2 trustees/directors, the other trustee/director is not required to be a member. A single-member fund cannot have a single individual trustee.
Why can’t a single-member SMSF have one individual trustee?
There are a number of reasons, including:
- The superannuation laws do not allow a single-member SMSF to have an individual trustee, reflecting the trust laws.
- There is no separation of assets between the sole member and the individual trustee, as required by superannuation laws and regulations. For example, Kevin White, as the individual trustee and sole member of the Kevin White SMSF, is the legal owner of all SMSF assets and his personal assets. The assets held by Kevin White are commingled, and it is not transparent who owns the assets.
- An SMSF is a trust structure and therefore holds assets on behalf of the members, who are the beneficiaries of the trust. If John Smith is the sole individual trustee and sole member of John Smith SMSF, John could not hold assets on his own behalf, as he cannot hold the fund’s assets on trust for his own benefit, which would undermine the basic principles of trust law.
- An SMSF trustee is required under trust law and super laws to act in the best interest of the member, which is very difficult if they are the same person. For example, he would not be able to sue himself if he acted inappropriately or fraudulently as a trustee.
Hint – The trust (the SMSF) is not a person or an entity and cannot be sued, but the trustee/s can.
What are the basic conditions a single-member SMSF must meet?
An SMSF must meet the definition of a complying superannuation fund under s17A of the Superannuation Industry (Supervision) Act 1993 (SIS) to receive concessional tax treatment.
A single-member SMSF must meet the basic conditions being:
- the fund has no more than 6 members
- the member must be a trustee or a director of a corporate trustee
- if the trustee of the fund is a company, the member must be:
- the sole director; or
- one of 2 directors, and the other director is a relative; or
- one of 2 directors, and the other director is not the employer of the member
- if the trustees of the fund are individuals, the member must be:
- one of 2 trustees, and the other trustee is a relative of the member; or
- one of 2 trustees, and the other trustee is not the employer of the member
- no individual trustee or a director of the corporate trustee can be paid for services provided to the fund in their capacity as trustee or director of the corporate trustee.
Example – single-member fund
John English wants to set up an SMSF, with John as the sole member and the sole director of the corporate trustee, to control all decision-making for the fund.
He sets up an SMSF with himself as the sole member and a special purpose company, “John English Pty Ltd”, with himself as the sole director, to act as the fund’s trustee.
This meets the basic conditions for an SMSF under SIS. The company is a separate legal entity, satisfying the obligation to keep the member’s and trustee’s assets separate, and the company can be sued in its own right. John essentially wears two hats, enabling him to:
- act honestly, diligently and in the best interests of the member in his capacity as trustee
- receive the benefits from the SMSF in his capacity as the sole member of the SMSF
When can another person be a trustee?
There are times when the sole member is unable to continue as the trustee of their SMSF, including:
- The member dies
Under SIS, the member’s executor can act in the deceased member’s place from the date of death until the death benefits start to be paid. However, the executor is not automatically appointed and must follow the usual rules under the fund’s trust deed and the company’s constitution (if a corporate trustee). The fund has 6 months to remove the deceased trustee and appoint the member’s executor. If the trustee is a company, the appropriate paperwork must be lodged with ASIC. This is why SMSF Estate planning is such an important consideration especially as members of the fund get older and reach retirement.
- The member becomes incapacitated
A member may lose mental or legal capacity, become legally disabled and unable to carry out their duties as trustee or director, or suffer from dementia for example. A member who has appointed an attorney under an enduring power of attorney (EPOA) can step into that member’s shoes and act as trustee or director. As above, the fund has 6 months to remove the trustee/director and the attorney appointed in accordance with the fund’s governing rules and the company’s constitution. An enduring power of attorney ceases on the member’s death.
- The member moves overseas for an extended period of time
The fund no longer meets the central management and control (CM&C) rules, failing the residency requirements to remain a complying Australian superannuation fund. There is no 6-month window in relation to the member moving overseas. Prior to the member moving overseas, the member’s attorney, based in Australia, with an EPOA, can be appointed as the trustee/director until the member returns and can once again resume their Australian residency. As noted above, the removal and appointment of the trustee/director must be done in accordance with the fund’s trust deed and the company’s constitution.