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Is bigger better? Expanding the membership of SMSFs

May 22, 2018, 15:42 PM

By Graeme Colley

Graeme Colley SuperConcepts SMSF expert

As announced in 2018 federal budget, the maximum number of members an SMSF can have is likely to increase from four to six people.

A membership increase may offer benefits. For some it could mean greater flexibility, particularly for small businesses with multiple owners who wish to pool their super into one fund. Also, it could benefit families wanting to ensure an intergenerational transfer of assets, especially business property.

As well, with more members there’s likely to be a larger pool of assets in the one fund, instead of smaller balances across several funds. This may provide some benefit if the limit to franking credit refunds eventuates. Excess franking credits could be absorbed in the fund and offset against non-franked income and taxable contributions.

Looking at existing stats, more than two-thirds of SMSFs have two members, just over 20% have one member and only about 7% of funds have three or four members. This suggests a limited underlying appetite for larger-membership funds, and if passed into law, there’s likely to be little impact on the SMSF sector as a whole.

For SMSFs expanding their membership, one possible issue could be increased administrative complexity.

There’ll be the need to make investment decisions for a larger pool of members. And this may lead to a more a conventional investment mix than would have otherwise been the case. Recent research by SuperConcepts and the University of Adelaide shows that as the number of fund members increase, investments tend to become less risky, and that group-think leads towards more familiar assets such as cash and domestic equities. So, funds wishing to expand their membership will need to take care to properly identify and address these behavioural factors.

More members may also mean a more decentralised fund with less desirable outcomes. Think of the scenario of children outvoting their parents on investments, estate planning and other fund matters. The outcome could be undesirable and inequitable – not good.

Six members could also result in more frequent membership changes as some members pass on, or move to their own SMSF or a publicly offered fund – placing strain on fund administration and associated costs.

Allowing funds to have up to six members further underlines the importance of appointing a corporate trustee for an SMSF. In addition, a fund with a corporate trustee would be penalised only once with a breach. In contrast, individual trustees who breach the rules could each be penalised personally for the breach.

So, to sum it up: The main benefit of a membership increase relates to the pooling of assets that would otherwise be spread more thinly. However, there seems to be a downside relating to administrative efficiency as well as investment decisions and performance.

At the end of the day, when considering the best number of members for an SMSF, there’s no one-size-fits-all answer. It will depend on individual circumstances – and a good first step may be advice from a qualified professional.