Australian SMSF - the legal framework

Introduction

The Australian self managed superannuation fund (SMSF) enables people to take control over their own finances whilst making sensible provision for their later years and providing some additional security for their family. As such it uniquely suits to the Australian psyche.

But necessarily there have to be legal and financial controls to avoid abuses as far as possible. These, together with tax penalties if mistakes are made, mean that SMSF trustees need to take care when establishing and running an SMSF.

Some people are happy to manage all aspects of their SMSF, dealing with all paperwork, making all investment decisions, and preparing their own accounts. If they do this, they are independent from all except the professional auditors for the annual audit and from the Australian Tax Office (ATO).

Most people prefer to engage professionals to do some or part of the work. In Australia there is quite an industry in offering SMSF services - lawyers, investment advisers and accountants.

I am a barrister practising in Australia and I am one of those people who manage all aspects of my SMSF. This is of professional interest to me. My trust deeds, corporate constitution and guidance packs are on sale on this site. My aim is to provide these documents (and if necessary to provide further advice) at a reasonable cost.

This article examines the legal framework within which SMSFs operate.

The SMSF - it's a trust

Under superannuation law, the legal entity holding the assets of a SMSF is not allowed to be the same legal entity as is ultimately entitled to the benefit of those assets.

This means that an SMSF is necessarily a trust. In lawyer's language, in a "bare" trust the trustee would hold the "legal interest" in the assets and the fund's member or members would hold the "beneficial interest" in those assets. Or sometimes lawyers say that the trustee holds the assets in law, while the member holds them in equity.

However, a superannuation fund is different from a bare trust because the member's right to the assets in the superannuation fund is so heavily circumscribed by statute that it has been heldFor example:
Kirkland [1997] FCA 684 that the member has no interest in the assets of the fund until the happening of an event entitling the member to receive the benefit. Instead the member has an interest in the fund itself, being a contingent interest in the underlying assets.

It is possible for an individual to have more than one legal personality. So the same person can be two legal entities at the same time in different capacities. This means that an individual can be a trustee of a fund in one capacity whilst also being a member of the same fund in another capacity.

Who are the trustees?

An SMSF can have either individual trustees, or a corporate trustee.

Australian law does not permit an SMSF to have only one individual trustee. There must be at least two trustees (up to a maximum of six). Each member of the fund must be a trustee (unless disqualified or below the age of 18). No member can be an employee of another member unless related. In single member funds it will be necessary to have an additional trustee. This can either be a relative of the member (including a spouse) or anyone else provided they are not the member's employer.

If the fund has a corporate trustee, each member of the fund must be a director of the company (unless disqualified or unable to act as director for other reasons). No member can be an employee of another member unless related. In single member funds the company can be controlled by the fund's sole member although there can be second director. If there is, that person can either be a relative of the member (including a spouse) or anyone else provided they are not the member's employer.

Children under 18

A child under the age of 18 can be a member of an SMSF. This is done by the child being represented in the fund by a parent or guardian. The parent or guardian must be a trustee where there are individual trustees and must be a director of the company in the case of a corporate trustee.

Adults without legal capacity

Adults without legal capacity (for example if they have a disability which seriously affects their ability to make decisions or communicate such decisions) can be represented in the fund by a legal representive. The legal representative must be a trustee where there are individual trustees and must be a director of the company in the case of a corporate trustee.

Typical variations

So here are some typical permissible SMSF structures with individual trustees:-

husband and wife as trustees, with husband as sole member
husband and wife as trustees, with wife as sole member
husband and wife as trustees, with husband and wife as members
husband and wife as trustees, with husband, wife and minor children as members
husband, wife and adult children as trustees, with husband, wife and adult children as members

Here are some typical permissible SMSF structures with a corporate trustee:-

corporate trustee controlled by husband, with husband as sole member
corporate trustee controlled by wife, with wife as sole member
corporate trustee controlled by husband and wife, with husband and wife as members
corporate trustee controlled by husband and wife, with husband, wife and minor children as members
corporate trustee controlled by husband, wife and adult children, with husband, wife and adult children as members

In each case the maximum number of members is six so separate funds would be needed if there were more children who needed to be members.

A person can be a member of as many funds as they wish.

If you are in doubt as to whether to use individual trustees or a corporate trustee for your SMSF you may find this article useful.

Jeremy Gordon
19 June 2021

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