By Graeme Colley
Six member SMSF funds - they sound like a sensible idea, don’t they? Put the family in one super fund, make joint investment decisions, help the children save and heaps more reasons. Why not?
Federal Parliament sits again today (March 14) and this increase in SMSF members is just one of the bills currently before the parliament and was introduced to the House of Representatives on 2 September 2020. The main change that will occur relates to the signing of a document which will require at least half of the trustees or directors of the trustee company to sign certain fund and regulatory documents. The bill also standardises the wording used in the SIS legislation so that reference to small funds is consistent.
This legislation could be passed as early as this week so we have done the hard work for you to help you prepare to move from a four (or less) person SMSF to one with five or six people.
The best advice about the family SMSF is to ‘look before you leap’, make sure you’ve done your homework and have concrete reasons for the final decision. Don’t forget if you don’t get it right, you and maybe the rest of the family may end up with no safety net and a big mess.
Understand the impact of the increase in SMSF members on decision making and fund administration
Appreciate the difficulties that can arise by the increase in SMSF members on investments and benefit payments
Recognise the benefits of increasing SMSF members from a wealth transfer angle
Experience shows that the decision to include family members as part of an SMSF can work well, but only in a limited number of cases. If everyone understands the purpose of superannuation, their responsibilities and respect each other’s views then it can work without any question.
However, issues can arise when there are differences in members’ ages and younger family members may lack interest and skills compared to their parents who may be close to retirement. There’s also the potential difference in investment choices by members as younger members may have longer investment time horizons than their parents. With those basics in mind let’s have a look at the essential technical requirements of having an SMSF.
The most essential requirement for an SMSF is that under the current rules you can’t have any more than 4 members but will likely increase to a 6-member limit. This puts families with 5 or more out of the question if they are after just one fund. However, it could be possible to have two or more funds for larger families. Maybe mum and dad in one fund and the kids in another.
Pros and cons of more members in an SMSF
Review lifestyle considerations
The trustee structure of the SMSF is important to enable the fund to be administered properly. The general rule is that all members of an SMSF who have legal capacity must be trustees of the fund or directors if there is a corporate trustee. If the children are under 18 they will need to have mum and/or dad to act in their place as fund trustee as they do not have legal capacity.
In the case of individual trustees, the fund’s trust deed may provide rules relating to the appointment and dismissal of trustees as well as meetings and trustee voting rights. These are important, especially with a family fund, as they will lay the ground rules on who does what and rules about the fund’s operation. It’s better to have it in writing than just some loose understanding which can be misunderstood when things get hot under the collar.
Voting rights can be important when it gets to decisions about the fund both from the point of view of individual trustees and a corporate trustee. The superannuation legislation requires each member to be a trustee or director, however, it does not stipulate the voting rights of those trustees or how a casting vote operates. While it is usual each trustee has one vote it is possible to have voting rights based on each member’s balance or any other method. If the trustee is a company, in addition to the fund’s trust deed, the constitution of the company may provide rules on directors’ meetings and voting rights.
It is important for members to ensure that their rights are protected if they were to pass away. This can be protected by your legal personal representative becoming a trustee or a director on your death. Careful wording of the trust deed can ensure this occurs automatically on your death. Having your legal personal representative as trustee will help to ensure the fund is administered correctly and your benefits are paid according to your wishes as provided in the fund’s trust deed. I think this is so important when it comes to family superannuation funds.
To ensure your benefits are paid as you wish you may consider providing a reversionary pension to qualifying dependents or make a binding death benefit nomination. If you are receiving a pension on your death which has a reversion to a survivor, they will continue with the pension until their death or they may have the option to convert it to a lump sum and withdraw the amount from the fund. If you have a binding death benefit nomination, your superannuation benefits can be paid to your dependents on your death and/or to your legal personal representative and have the amount distributed according to your will. Correct legal drafting of these documents will help ensure that the nominations or your instructions are not subject to challenge.
Then there’s the investment side of the fund which is the main thing about superannuation. Having members of different ages is not an impossible problem to solve as they may all agree on a range of assets that are diversified and take the long-term perspective of the fund into account. In some situations, if the family is involved in a small business it is possible to have a business property in the fund which can use superannuation savings effectively by leasing the property back to the family business. In the long term, if the children continue with the business they may retain the property in the fund as part of an intergenerational transfer of assets which can be tax-effective. Also, assets that are held in a superannuation fund are protected from creditors in the event of a member’s bankruptcy.
The day will probably come when the children may wish to move their benefit to another superannuation fund, so they can have their family share in the benefit of a family SMSF. This is something that needs to be planned just like the original decision to have the original family SMSF in the first place. This will require decisions concerning the change in trustee or directors of the fund, reviewing investments and investment strategies as well as transferring benefits to the new fund. It is worthwhile seeking advice to ensure this happens as smoothly as possible.
So, there are some things to think about if you and the family are thinking about having a family SMSF. Good planning and understanding the reasons for having the fund are essential to avoid any potential mess that may prove impossible to fix.
Irrespective of the maximum members for a small fund, the main question to consider is how many members are a good idea in the circumstances. Most SMSFs have one member (23%) or two members (70%) and there are a lot fewer funds with three and four members. No one really expects that an increase to a maximum of six members of an SMSF will result in a torrent of new funds. But it provides greater flexibility for families with more than 4 members to benefit from the change. In some situations, there may be special reasons to have up to 6 members.
No matter how many members are permitted in an SMSF there are pros and cons that apply. This may include the operation of the fund, investment decisions and paying benefits to members.
The main advantages of the proposed increase to 6 members are:
Larger families are catered for,
There is most likely a reduction in operating costs compared to a family that would require 2 or more funds to achieve the same outcome,
More efficient fund administration as a corporate trustee is required for a fund with more than 4 members to meet the State trustee legislation, and
Greater ability for the SMSF to qualify as an Australian superannuation fund when one or more members travel overseas for a prolonged period, saving in administration costs.
Disadvantages of a 6 member fund may include:
Ensuring the fund’s trust deed is able to cater for the increase in member numbers.
Difficulty in the administration of an SMSF due to the number of members involved,
Reduced efficiencies in decision making, and
Overall control and management of the fund, for example, the decision of the trustees/members to appoint or remove trustees
The positives for making fund investments are that the additional investing power of an SMSF with 6 members should have greater negotiating and purchasing power and taxation strategies may be implemented more efficiently.
The negatives around fund investments need to be managed properly as investment considerations may be indecisive, due to the range of members’ ages investment choice may vary significantly and naming conventions may hold up the final decision.
The main positives from benefit payments are that estate planning can be streamlined with a greater number of members and the ability to assist with the intergenerational transfer of wealth. This can provide taxation advantages as family members join and leave the superannuation fund.
Negatives can arise out of relationship breakdowns involving fund members, lack of clarity when it comes to the distribution of death benefits to nominated beneficiaries and potential financial abuse.
The increase in the minimum number of members of an SMSF may not be the perfect cup of tea for some but it may be something others may have been looking forward to for some time.