How to add a new member to your SMSF

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:

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.

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.

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.