By Graeme Colley
Executive Manager, SMSF Technical and Private Wealth
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?
Besides allowing SMSFs to have up to 6 members since 1 July, the main change is that regulatory documents must be signed by at least half of the trustees or directors of the trustee company.
The best advice about the family SMSF is to ‘look before you leap’, and make sure you’ve done your homework and there are 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 respects 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 the younger ones may have a longer investment time horizon 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 if the amending Bill is passed, that will 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 2 or more funds for larger families. Maybe mum and dad in one fund and the kids in another.
What to think about before increasing the number of members:
- Pros and cons of more members in an SMSF
- Lifestyle considerations
- Paying benefits
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, dad or their personal guardian acting 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.
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 for those 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, or extremely difficult and costly, to fix.
Irrespective of the maximum members for a small fund, the main question to consider is how many members is a good idea. Most SMSFs have one member (23%) or 2 members (70%) and there are a lot fewer funds with 3 and 4 members. No one really expects that an increase to a maximum of 6 members of an SMSF to 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.
- 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.
- 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. In addition, due to the range of members’ ages, investment choice may vary significantly and naming conventions may hold up the final decision.