Since 1 July this year, Self Managed Superannuation Funds (SMSFs) have been permitted to have up to six members. This increase, up from a maximum of four members, marks the end of government policy that has existed since 1994.
A significant impact of this change in the law is that larger families (e.g. a couple with more than two children) can all be members of the same SMSF.
Does this make sense for you?
Benefits
Such larger families would previously have required at least two SMSFs to manage their superannuation as a family unit. This law change can:
- Reduce costs and complexity;
- Bring benefits such as accessing investments that require scale, for example, large assets such as direct property);
- Give greater opportunity to employ leverage (in very specific circumstances) due to more ability to meet borrowing costs from more members making contributions.
- Make planning for and control of intergenerational wealth transfer simpler;
- Provide greater flexibility to stay within the superannuation rules when member trustees move around the world.
For example, a couple can fulfil that retirement dream of spending a few years in France, or their age twenty-something children may tread the well-worn path of living and working in London, without breaching the ‘central management and control in Australia’ rule, allowing family members to stay actively engaged in their complying fund.
Though we note there are plans (yet to be enacted) to relax the Australian residency requirements for complying SMSF members.
Limitations
- The potential for family/relationship breakdown or disagreements can cause significant problems and complexity within a SMSF.
Similarly, where children are members of an SMSF along with their parents, difficulties arise when the children inevitably have relationships and children of their own.
Similarly, where not all siblings in a family are members, this can lead to difficulties around nominations for and the payment of death benefits. Not to mention the estate planning issues.
- More trustee members of a single SMSF brings together more opinions and potential divergence of member interests when it comes to how to run the SMSF.
This can result in difficulties and complexities with the investment strategy of a fund. For instance, the appropriateness of an investment strategy for a retired couple in pension phase is likely to be markedly different from that of a young member in accumulation phase.
As more member interests are considered, the ability to implement a strategy that achieves the best outcomes for any individual member is more difficult. This issue is solvable through deliberate structuring of investments to account for separate member strategies, but simplicity and cost-effectiveness can be trade offs.
- Care needs to be taken when considering the choice between having a corporate trustee and individual trustees. Having more individual trustees will increase the potential for administrative burden and associated difficulties in the event of the passing, disablement or otherwise a change needing to be made to a fund’s members.
It is simpler to change a corporate trustee and its directors than change individual trustees of a SMSF. However, this brings its own potential complexity due to limitations and variations in State and Territory Trust laws.
In conclusion
There are benefits and limitations to having a large number of members in a SMSF. It is important to understand if this suits your circumstances and financial goals.
Before making any decision to have many members in your SMSF we urge you to take advice from your Private Client Adviser.