Parliament are currently deliberating over the six-member bill for SMSFs which is expected to come into effect next financial year.

The announcement of a six-member fund surprised many in the industry given over 90% of SMSFs currently have only one or two members.

However, a six-member fund provides people with more flexibility in an SMSF and will be attractive in some circumstances, so we’re going to explore the benefits of them and highlight important questions to consider.

Benefits of a six-member fund

There are some significant benefits in increasing the number of members in a fund from four to six.  

• As the most tax effective vehicle in Australia, a six-member fund can be advantageous for the transfer of wealth from one generation to another. In a Mum and Dad scenario, it will be possible to add up to four children to an existing SMSF and implement the strategies available to transfer wealth/investments to children in a tax effective manner.
• If a member is running a business, by adding more members to a fund it may become viable for an SMSF to own the business property outright and lease it back to the business. The two key benefits of holding business property in an SMSF include asset protection, as assets held in an SMSF are protected if a member is declared bankrupt. The other benefit is that you can hold the property for a longer term in an SMSF as part of the transition of wealth strategy.
• With a six-member fund SMSFs become more cost effective to run, and therefore more viable for more people. This is because the running costs can be split six times rather than four.
• Having a larger pool of funds to invest in an SMSF provides more flexibility surrounding diversification of assets.

As a parent myself, I like the idea of having Adult children in my SMSF as it provides a great opportunity to teach them about investments, taxation and planning for the future.

Important items to consider

Whilst you may find the idea of having your children in an SMSF appealing, remember, as an SMSF member they must also be a fund trustee.

As a trustee, they are responsible for overseeing all matters of the fund, which includes ensuring the financial statements and Annual return are accurate at the end of each financial year.

This will give them full access to your member balance – meaning they will know exactly what Mum and Dad have sitting in super, and what any death benefit insurance will be payable upon death. Perhaps not ideal in some circumstances.

There are some challenges in running a six-member SMSF, but like any challenge they can be overcome with simple planning.

Important questions to consider:

What is the better fund structure? Individual or Corporate trustee?

It’s likely the majority of funds would select a Corporate Trustee, as you can add or remove members in the SMSF without the administrative burden. With an Individual Trustee structure, you would need to update the names of all investments, bank accounts and underlying fund documentation every time you have a change of member which is not only time consuming but can be expensive.  

Does the fund trust deed specifically refer to 4 members?

If it does, you will need to update the fund deed prior to making any changes which is a fairly straightforward process.

What happens if there is a disagreement about a fund matter?

Super legislation does not specify the voting rights, but if you have a corporate trustee, the constitution may provide rules on voting rights. It’s vital to ensure this is agreed upon before adding a member to a fund to ensure the existing member’s rights are protected.

What happens if a member wants to leave?

It’s prudent to ensure the SMSF trust deed includes a clause outlining the terms upon which a member may leave the fund. This will help avoid any disputes in the event any of them want to exit the fund.

How do you determine how to invest, when the risk profile and needs of older members will be very different to younger Adults who have a much longer period to retirement?

There are two approaches one can take here. Consider the overall fund risk profile and invest to suit the fund as a whole or consider asset segregation.

In an SMSF you can completely segregate bank accounts, and underlying investments by member, enabling each member to determine their own investment selection, desired rate of return and asset allocation accordingly.   

How do you make sure your superannuation and any insurance benefits are handled as per your wishes when you die?

This may be one of the highest risks of adding additional people to an SMSF but can be overcome by ensuring a valid binding death benefit nomination is in place or a reversionary pension to dependents.

Summary

Before making any decisions regarding SMSF fund structure it’s wise to seek formal financial advice to ensure your personal circumstances are fully considered and any future risks identified and mitigated.

If you’d like to discuss further, please don’t hesitate to contact Karen Dezdjek or Olivia Long.

The information in this article contains general advice and is provided by ExpertSuper™ Pty Ltd as an authorised representative of Primestock Securities Ltd AFSL 239180. That advice has been prepared without taking your personal objectives, financial situation or needs into account. Before acting on this general advice, you should consider the appropriateness of it having regard to your personal objectives, financial situation and needs. You should obtain and read the Product Disclosure Statement (PDS) before making any decision to acquire any financial product referred to in this article. Please refer to the FSG (available here) for contact information and information about remuneration and associations with product issuers.This information should not be relied upon as a substitute for professional advice, and we encourage you to seek specific advice from your professional adviser before making a decision on the matters discussed in this article. Information in this article is current at the date of this article (12 November 2020) and we have no obligation to update or revise it as a result of any change in events, circumstances or conditions upon which it is based.