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Home / SMSFs / SMSF administration

How to add a new member to your SMSF

August 7, 2020 by Penny Pryor Leave a Comment

Reading time: 4 minutes

On this page

  • What is the process?
  • Compliance
  • Investment
  • Segregating assets
  • Final points

Many self-managed superannuation funds (SMSF) start off with just one or two members but, as members’ children mature and become adults, some SMSF trustees seek to add dependents to their fund. Or they may decide to add a business partner or professional associate to their SMSF.

Although the maximum number of members of an SMSF is still four (and efforts to increase that number six have been stalled), that makes it possible for a couple and two adult children or a couple and a child plus their spouse to join the fund at a later date.

What is the process?

The process of adding a member will depend on the structure of the SMSF. If the SMSF is operating under a corporate trustee structure – where a company is set up to act as trustee of the fund – the member will need to be added as a director of the company.

If it is operating under an individual trustee structure, the member will need to be added as another member. Either way, the ATO must be notified in writing of any changes to a fund within 28 days. The change also needs to be discussed, agreed to and minuted at a trustee meeting. The trust deed must also allow the addition of members.

New members must consent in writing to becoming a member. They must also sign a trustee declaration from the ATO and submit to the fund. This declaration should be kept for at least ten years and made available to the ATO upon its request. This is the same form that the original members would have signed and submitted when they established the SMSF. As detailed on the first page of this form, new trustees are also strongly advised to undertake a free SMSF education course.

We strongly recommend you undertake a free trustee education course before reading and signing this declaration. For more information visit ato.gov.au/smsf and search ‘approved education courses’.

Source: ATO

Compliance

Anyone who wishes to become a member must be eligible and must not be a disqualified person. To be eligible you must be able to answer ‘no’ to the following questions:


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Have you ever been convicted of a dishonest offence, in any state, territory or a foreign country?
Offences of a dishonest conduct are things such as fraud, theft, illegal activity or dealings. These convictions are for offences that occurred at any time, including convictions that have been ‘spent’ and those that the court has not recorded, due to age or first offender.

Have you ever been issued with a civil penalty order?
Civil penalty orders are imposed when an individual contravenes a civil penalty provision. This can be an order to pay a fine or serve jail time.

Are you currently bankrupt or insolvent under administration?
You cannot be a trustee of an SMSF while you are an undischarged bankrupt. You cannot remain a trustee if you become bankrupt or insolvent after you are appointed.

Have you been previously disqualified by the ATO or APRA?
The commissioner of taxation as regulator can disqualify a trustee. This disqualification is permanent and is not just specific to the SMSF you were a trustee of at the time. The Federal Court can make an order to disqualify a trustee of an APRA fund. This is permanent and this disqualification does not allow you to operate an SMSF.

Source: ATO

Investment

The investment strategy document will also have to be updated. This will be particularly important if the new members are significantly younger than the original members and have a more growth-oriented approach to investment. This will necessitate a review of the fund’s overall investment strategy to confirm that it meets the objective of all members equally.

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Even if there are no big age differences, members will need to meet to discuss the investment strategy and confirm that they all have similar approaches to risk and are comfortable with the fund’s investments.

A strategy review may result in an increased allocation to growth assets, such as equities, and could result in the addition of a paragraph in the investment strategy document along the lines of:

With the addition of member A (22 years old) and B (19 years old) the trustees have agreed that an increased allocation to growth assets (from 60 per cent to 70 per cent) is necessary to meet the retirement needs of all members. The additional 10 per cent of growth assets will be invested in Australian equities. Within that allocation to Australian equities, the fund will seek a significant portion of quality companies that prioritise dividends in order to maximise the fund’s income for members close to retirement as well as capital gains for those members with a higher risk profile.

Source: ATO

Segregating assets

Segregating an SMSF’s assets into different ‘pools’ with different investment strategies could be one way for an SMSF to deal with the different risk profiles and retirement outlooks of new members.

It would enable older members of a fund to keep a more conservative approach to investment while enabling the younger members to adopt a growth-oriented approach. Each pool will need a separate investment strategy document and possibly a separate bank account for contributions. Asset ownership in each pool would need to be assigned to the correct members and the trust deed may also need to be amended to allow segregated assets.

Also, since 2017 and the introduction of the transfer balance cap, if a member of an SMSF has a total super balance of more than $1.6 million and is also receiving a pension from any source, the fund is unable to segregate assets for investment purposes. 

Final points

Adding a child or a new member to an SMSF may seem like a good idea at the time but it’s important to consider any long-term implications.

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What will happen if that child finds a spouse and there is no room for them in the SMSF?

Can they easily leave the SMSF and what will be the fallout for the SMSF’s assets if they do?

What happens if the original members of the SMSF fall out or separate?

These are all issues that need to be carefully discussed by the SMSF’s members and potential members before anyone new is added.

See also SuperGuide article Multi-generational SMSFs: Benefits and pitfalls.

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Learn more about SMSF administration in the following SuperGuide articles:

Your SMSF calendar

January 4, 2021

What you need to know about six member SMSFs

December 1, 2020

SMSF trustee housekeeping checklist for 2020/21

June 29, 2020

Guide to the ATO SMSF supervisory levy

June 1, 2020

The SMSF trustee declaration explained

June 1, 2020

Guide to SMSF trust deeds

June 1, 2020

SMSF annual admin checklist

April 22, 2020

Top 5 mistakes SMSF trustees make with their annual returns

April 22, 2020

Guide to SMSF administration, reporting and record-keeping

January 1, 2020

SMSFs: What advice can your accountant provide?

December 14, 2019

How to wind up an SMSF

December 4, 2019

How to record SMSF minutes

November 3, 2019

Guide to SMSF audits

June 14, 2019

Real DIY super: Ways that SMSFs can be ultra low-cost

May 2, 2019

Estate planning, super and SMSFs: Getting your house in order

February 11, 2019

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IMPORTANT: All information on SuperGuide is general in nature only and does not take into account your personal objectives, financial situation or needs. You should consider whether any information on SuperGuide is appropriate to you before acting on it. If SuperGuide refers to a financial product you should obtain the relevant product disclosure statement (PDS) or seek personal financial advice before making any investment decisions. Comments provided by readers that may include information relating to tax, superannuation or other rules cannot be relied upon as advice. SuperGuide does not verify the information provided within comments from readers. Learn more

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You should consider whether any information on SuperGuide is appropriate to you before acting on it.

If SuperGuide refers to a financial product you should obtain the relevant product disclosure statement (PDS) or seek personal financial advice before making any investment decisions.

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