While it’s not yet in force, the limit on SMSF member numbers is set to increase from the current four to six members later this year.
For some SMSFs, this will be a welcome change and will mean additional family members can join their existing fund.
Implications of the rule change
The new legislation is currently before Parliament and should come into force in the second half of 2021.
Although 93 per cent of SMSFs only have one or two members, for larger families the reforms will provide greater flexibility to add extra members. This could include adult children and their partners.i
While adding members to your SMSF will be easier, there are potential drawbacks as well as opportunities to including multiple generations in the one fund. So it’s important to think through the ramifications and get professional advice before acting.
Benefits of additional members
Larger SMSFs can have a number of benefits, including the potential to lower the overall fees paid by members. Many annual running fees – such as the annual auditing fee – are charged on a fixed dollar basis, regardless of the number of members.
With more members, costs per member will reduce. Adding extra members to an existing SMSF also avoids the expense of running several SMSFs to cover all family members.
Adding members to your SMSF will also create a larger pool of super money to invest. A higher overall fund balance increases your choice of potential investments and can improve diversification.
You will also have more negotiation and purchasing power and it can make it easier to implement certain tax strategies.
Wealth transfer benefits
In many situations, having all the family members in a single SMSF can help with intergenerational wealth transfer.
It can potentially streamline your estate planning and provide tax advantages as ownership of key assets is retained within the SMSF, reducing buy/sell costs and capital gains tax bills.
Given the lower annual contribution caps since 2017, having more fund members can also help an SMSF have the capital to purchase larger assets such as your business premises.
Additional members also make it easier for one or more of the SMSF’s trustees to travel overseas for an extended period without endangering the fund’s complying status.
More complex decision-making
Expanded funds can work well if all the members agree and get along, but the SMSF structure can make managing conflict difficult.
More members mean more risk of a dispute. Relationship breakdowns between fund members can also be a problem, particularly if account balances need to be withdrawn or divided between divorcing partners.
Additional trustees also reduce the control an individual trustee has over decision making, which is often the key reason for establishing an SMSF.
Bigger funds also mean more complex administration and slower, inefficient decision making. Appointing and removing trustees can also become harder.
Considering the different generations
Investing appropriately for additional members needs careful management. If the SMSF includes several generations, designing your fund’s investment strategy will be more complex, as it must suit members with diverse risk profiles and investment horizons.
With more members, paying out death benefits can be trickier. Payment decisions made by other trustees may not be what the deceased member intended. If the SMSF’s key asset is a business premises, the fund may have limited liquidity to pay a benefit.
An enlarged SMSF can also create the potential for financial abuse, with elderly fund members outvoted or manipulated by younger trustees.
Look before you leap
Trust legislation in some Australian states prohibits more than four individual trustees in a trust, so SMSFs looking to add members need to check the rules in their state.
Trustees will also need to check the SMSF’s trust deed. Some deeds prohibit more than four members, so it must be amended before additional members can join.
Amendments may also be needed to cover who and how many trustees are required to sign documents and cheques on behalf of the SMSF.
If you’d like to discuss these proposed changes or the running of your SMSF please give the team at ADR Wealth a call.