The Hidden Dangers of Individual Trustees in SMSFs – and Why Section 19 Matters

For nearly three decades, I’ve been warning trustees that the structure of their SMSF is not just a compliance box to tick — it’s the foundation stone that keeps your family wealth safe, compliant, and in your control. And nothing demonstrates this more than the risk of running an SMSF with individual trustees rather than a corporate trustee.

Why Section 19 of the SIS Act is Your Starting Point

Section 19 of the Superannuation Industry (Supervision) Act 1993 sets out when a super fund is a regulated fund. Being regulated is not just a nice-to-have — it’s the golden ticket to concessional tax treatment (15% in accumulation phase, 0% in pension phase) and the right to operate as an SMSF under the law.

To satisfy section 19, your fund must meet strict structural rules in section 17A — including who can be a trustee, how many members you can have, and the relationship between members and trustees. If you get this wrong, your fund can lose regulated status. And if that happens, you don’t just lose the tax benefits — you open the door to the Commissioner treating the fund’s assets as if they were held in an unregulated entity. Think 45% tax on the entire value of the fund.

I’ve seen it happen — and it’s ugly.

The Weaknesses of Individual Trustees

If you and your spouse are individual trustees of your SMSF, you are each personally responsible for every decision and every breach. Under section 166 of the SIS Act, administrative penalties apply per trustee. Two trustees = double the penalty.

But penalties are just the start. Here are the practical risks:

1. Title and Ownership Nightmares

With individual trustees, every asset of the fund — from bank accounts to shareholdings to property titles — must be held in the names of all trustees as trustees for the SMSF.Change a trustee (because of death, incapacity, divorce, or simply adding a member) and every asset title must be updated. This is expensive, time-consuming, and a compliance tripwire.

2. Estate Planning Chaos

When a member dies, their legal personal representative must step in as trustee until the death benefit is paid. If you have individual trustees, this means changing names on all assets again — often while emotions are high and family disputes are brewing. In blended families, this is an engraved invitation for litigation.

3. Increased Litigation Risk

Each trustee is jointly and severally liable for fund decisions. If one trustee goes rogue, both are on the hook. Creditors and claimants know this — and they will target the individual trustee’s personal assets.

4. Higher Likelihood of Breaching Section 17A

I’ve lost count of the number of funds that, after a marriage breakdown, death, or new relationship, quietly stop meeting the trustee/member structure required by section 17A.Breaching section 17A means the fund ceases to be an SMSF — which means it fails section 19’s definition of a regulated fund. This is the slippery slope to deregulation.

The Corporate Trustee Advantage

With a company as trustee:

• One-off setup, minimal future changes: The company remains on title for all assets — only directorships change if members come or go.
• Single penalty unit: Administrative penalties apply once per contravention, not per director.
• Better estate planning alignment: Your company constitution can dovetail with your SMSF deed to implement death benefit strategies without triggering title changes.
• Cleaner compliance with section 17A: Easier to maintain the trustee/member alignment required to keep your SMSF regulated under section 19.

Section 19 Breaches – Real World Impact

If your SMSF no longer meets the definition of an SMSF under section 17A, it fails section 19. The ATO can:

• Make your fund non-complying (tax at 45% on the value of assets and future income)
• Issue significant administrative penalties
• Disqualify trustees
• Freeze the fund’s assets under section 264 of the SIS Act

In other words — lose your regulated status, lose your tax benefits, and potentially lose a lifetime’s worth of savings.

My Recommendation – Upgrade Now

If your SMSF still has individual trustees, it’s time to future-proof your fund:

1. Upgrade to a corporate trustee — ideally a special purpose SMSF company.
2. Update your SMSF deed to allow for the corporate trustee structure and modern compliance strategies.
3. Review your member/trustee arrangements against section 17A so you never fail section 19.
4. Integrate your SMSF structure with your estate plan to keep control in your bloodline.

It’s a one-off investment for decades of protection — and it’s a lot cheaper than the cost of fixing a section 19 breach after the fact.

Bottom line: Section 19 is the gatekeeper to your SMSF’s tax and compliance status. Individual trustees increase the risk of falling foul of the law, dragging your fund — and your retirement savings — into a compliance and tax disaster.

In my book, that’s an unnecessary risk. Protect the fund, protect the tax concessions, protect the family wealth. Upgrade now