When you set up an SMSF, one of the most important decisions is whether to use individual trustees (you and maybe your spouse or family members) or a company trustee (a company acts as trustee and the members are directors).
At first, individual trustees can look simpler and cheaper. But the hidden risks are significant. The law that governs SMSFs links your fund’s structure directly to whether it qualifies for the tax concessions that make an SMSF worthwhile. Get the structure wrong, and your fund could be taxed at 45% instead of 15% or even 0%.
Where the Rules Come From
The rules for SMSFs come from the Superannuation Industry (Supervision) Act 1993 (SIS Act). This is the main law that sets out how superannuation funds in Australia must operate.
Two sections are critical:
Section 17A defines what an SMSF is. It sets out the structure: how many members you can have, who can be a trustee, and how members and trustees must align. If your fund doesn’t meet these rules, it stops being an SMSF under the law.
Section 19 sets out when a super fund is a regulated fund. Only regulated funds get the tax concessions (15% in accumulation, 0% in pension phase). One of the conditions for being regulated under section 19 is that your fund must qualify as an SMSF under section 17A.
In other words, if your SMSF fails section 17A, it automatically fails section 19. If you fail section 19, you lose your regulated status and your tax benefits. The ATO can then tax the fund at 45%.
Why Individual Trustees Are Risky
With individual trustees, you and the other trustees are personally responsible for every decision and every compliance breach. Penalties from the ATO are applied per trustee, which means double the hit if there are two of you. More importantly, individual trustees create practical problems that can push your SMSF out of alignment with section 17A and therefore risk failing section 19.
Common issues include:
Title and Ownership Problems
Every SMSF asset must be registered in the names of all trustees as trustees for the SMSF. If a trustee changes due to death, incapacity, divorce, or adding a member, every title has to be updated. This is costly, time-consuming, and a compliance risk.
Estate Planning Complications
When a member dies, their legal personal representative must step in as trustee until death benefits are paid. With individual trustees, that means changing the names on all assets at a time when the family is already under stress. In blended families, this is often the trigger for disputes and litigation.
Litigation Exposure
Trustees are jointly and severally liable. If one trustee makes a mistake or acts improperly, both are liable. That means creditors can pursue the personal assets of each trustee, not just the SMSF’s assets.
Risk of Falling Out of Alignment
After a death, divorce, or new relationship, many funds with individual trustees stop meeting the section 17A definition of an SMSF without even realising it. Once that happens, the fund fails section 19. That’s when the tax consequences can be catastrophic.
Why a Company Trustee Is Safer
With a company trustee, the company stays on all asset titles permanently. When members join or leave, you only update the directors — not every asset title. This keeps the fund in alignment with section 17A and protects your compliance under section 19.
Other advantages
Penalties apply once per contravention, not per trustee.
The company constitution can be designed to integrate with your SMSF deed, helping with estate planning.
Much less paperwork and cost when membership changes occur.
What Happens If You Fail Section 19
If your fund is no longer an SMSF under section 17A, it fails section 19. The ATO can:
- Make your fund non-complying, which means a 45% tax hit on fund assets and income
- Impose significant administrative penalties
- Disqualify trustees
- Even freeze the fund’s assets
This is not theory. It happens in practice, and when it does the financial consequences can destroy years of retirement savings.
The Bottom Line
Section 19 is the gatekeeper to your SMSF’s tax concessions. Section 17A sets the definition that keeps you inside that gate. Individual trustees make it too easy to fall out of alignment and lose regulated status.
A company trustee is a one-off investment that simplifies compliance, protects your tax concessions, and future-proofs your fund.
If your SMSF still has individual trustees, now is the time to upgrade. Protect the fund. Protect the tax concessions. Protect your family wealth.