Running multiple SMSFs: What are the pros and cons?

Setting up a second SMSF can also be a suitable strategy for SMSFs with two or more generations of members (such as parents and their adult children).

In this situation, fund members are likely to be in very different stages of their retirement journey, with some members still accumulating retirement savings and some drawing down on their savings pool built up over many years. It can be tricky for SMSF trustees to administer and invest both accumulation and pension accounts in the best interests of members of different ages and investment risk profiles.

More members, or more than one SMSF?

Controlling your own super savings and investment strategy is one of the main reasons Australians cite for choosing to run their own SMSF. But until 30 June 2021, the maximum number of members you could have in an SMSF was four, so this encouraged many families to set up multiple SMSFs to cater for multigeneration wealth accumulation.

As of July 2021, the maximum number of members in an SMSF is six. While this solved the problem for some families seeking greater control of their super investments, there are other – often larger – families who need to consider other options such as multiple SMSFs to manage a retirement savings pool covering multiple generations and extended family members.

Watch out for the tax man

Although the ATO has not released updated statistics on the number of trustees running multiple SMSFs, it remains concerned about the potential for inappropriate use of multiple SMSFs. The concern now is linked to the emergence of retirement planning schemes being sold to retirees and prospective retirees so they can avoid paying super taxes, or illegally access their super savings early.

Through its Super Scheme Smart initiative, the ATO regularly warns SMSF trustees and super professionals about the risks inherent in retirement planning schemes. These arrangements attract severe penalties and trustees can lose their right to act as a trustee and to manage and operate an SMSF.

In recent years, retirement planning schemes attracting ATO attention have included “improper use of multiple SMSFs”, particularly those involving “deliberate use of multiple SMSFs to manipulate tax outcomes”. An example of this behaviour is repeatedly switching the SMSFs between the accumulation and retirement phase to ensure large gains and income are always incurred by assets in the retirement phase.

In February 2024, ATO deputy commissioner Emma Rosenzweig noted 66% of illegal early access behaviour among SMSFs related to individuals entering the system with no genuine intent to run an SMSF. She said newly established SMSFs were more likely to engage in this type of behaviour, with a red flag for potential illegal behaviour being funds making a rollover but failing to lodge their first annual return.

Ongoing ATO concern about the potential misuse of SMSFs means trustees considering establishing multiple SMSFs need to ensure they comply with the super rules at all times and do not act in ways that are likely to attract the attention of the regulator.

What are the potential benefits of running multiple SMSFs?

1. Achieving tax savings

Following the 2017 legislative changes, the only way to segregate assets with high income-producing or high capital growth potential into a pension account and to minimise the tax payable is by setting up a second SMSF to hold these types of assets

2. Easing estate planning

Setting up a second SMSF can facilitate the smooth transfer of assets to specific beneficiaries when a member dies. Having multiple SMSFs can help avoid the potential for disputes over the distribution of SMSF assets and can also help keep super interests separate in the case of a blended family.

Estate planning can be one of the strongest arguments for running multiple SMSFs, as even the most carefully developed estate plan can be derailed if trustees fail to follow the wishes of the deceased member.

3. Isolating risk

Setting up a second SMSF allows higher risk investments to be isolated from other super assets to protect against potential claims. For example, if the SMSF owns several properties, setting up a separate fund to hold these assets can protect your other super assets from a costly public liability claim for injury or loss.

4. Reducing trustee disagreements

Running a second SMSF to hold specific assets or pension accounts can reduce the potential for conflict or deadlocks between fund members over how the fund operates and invests its assets. Six-member SMSFs and multigenerational funds can find establishing and maintaining agreement among trustee members difficult if interpersonal relationships become strained.

5. Minimising land tax on property investments

In some states, having more than one SMSF to own separate parcels of real estate can be a useful tool for minimising the fund’s potential land tax bill.

6. Implementing different investment strategies

When the age variation between fund members is substantial, different asset allocation strategies are normally required. An older SMSF member may want an investment allocation strategy designed to deliver a consistent income stream, while a younger member may seek a strategy focused on capital growth. Satisfying both objectives can be difficult within a single SMSF. 

7. Matching varying risk profiles

In an SMSF where member ages vary widely, member risk profiles are also likely to be different. Younger fund members are typically likely to have a higher appetite for taking on investment risk than members closer to retirement. But even couples of similar ages can have vastly different tolerance for risk. Often the easiest solution is to set up separate SMSFs with tailored investment strategies based on the age or risk tolerance of their members.

What are the potential downsides of running multiple SMSFs?

1. Additional establishment and maintenance costs

Establishing a second SMSF means you are up for an additional set of establishment costs, which can include a CGT liability and stamp duty on any assets transferred from the existing SMSF to the new fund.

2. Multiple annual compliance costs

Two SMSFs means two sets of annual administration costs. According to the latest data available from the ATO, the average operating expenses for an SMSF in 2020–21 was $6,427, with the median being $4,139. These operating expenses include deductible and non-deductible expenses such as the approved auditor fee, management and administration expenses, other amounts and the SMSF supervisory levy. The data shows SMSFs with higher balances generally face higher expenses than those with lower balances.

The average total cost of running an SMSF over the same period was $15,507, with the median being $8,611. The total cost includes deductible and non-deductible expenses such as interest within Australia and overseas, member insurance premiums, the SMSF auditor fee, investment expenses, management and administration expenses, forestry managed investment scheme expenses and other amounts, and the SMSF supervisory levy.

3. Increased auditor and ATO scrutiny

SMSFs must meet the sole purpose test, which requires the SMSF to be set up and maintained for the sole purpose of providing benefits to members in retirement, or to their beneficiaries if they die. Setting up an additional SMSF is likely to attract scrutiny from both the fund’s auditor and the ATO as to whether the fund complies with this test. Given the ATO’s ongoing interest in tax minimisation schemes and retirement planning schemes for illegal early access, running two or more funds may attract regulatory attention.

The bottom line

It’s legally possible to run two or more SMSFs, but there are both potential benefits and downsides to pursuing this strategy.

The benefits of setting up two or more separate funds need to be carefully weighed against the costs involved, as these can be significant.

Whether or not setting up a second SMSF is a good option depends on your individual circumstances. It makes sense to seek independent professional advice about your specific situation before you make a decision, as these types of changes to your retirement savings strategy can be complex and costly to unwind at a later date.

The information contained in this article is general in nature and does not consider your personal circumstances.