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Under super legislation it’s perfectly legal to establish and run more than one SMSF, just as it’s fine to have a super account in more than one super fund.
While it may be legal, there are a number of important pros and cons to consider before taking the plunge.
To help you determine whether it’s a good idea for your situation, SuperGuide has investigated reasons for and against having more than one SMSF.
Two SMSFs: When could it make sense?
Although running multiple SMSFs sounds like a lot of extra work, there are genuine reasons some people decide to have more than one fund:
1. When one or more members has a high balance and is retired
If a member of an SMSF is in (or is about to enter) the retirement phase, it can make sense to set up an additional SMSF as a tax-free pension account to hold their high growth or high income-producing assets.
Up to $1.7 million of the retiree’s super assets can then be transferred into the tax-free retirement account to support their pension payments, while their remaining super assets are left in the existing SMSF in a taxable accumulation account. (The amount you can transfer into a retirement account, the so-called transfer balance cap, increased from $1.6 million to $1.7 million from 1 July 2021).
2. When the SMSF has two generations of members
Setting up a second SMSF can also be a suitable strategy for SMSFs with two generations of members (such as parents and their adult children). In this situation, fund members are likely to be in very different stages in their retirement journey – accumulation and drawdown – forcing trustees to administer both accumulation and pension accounts.
More members, or more than one SMSF?
Controlling your own super savings and investment strategy is one of the main reasons Aussies cite for choosing to run their own SMSF. But the maximum number of members you can have in an SMSF has only recently increased from four to six, so in the past this encouraged some people to set up multiple SMSFs.
However, since the Treasury Laws Amendment (Self-managed Superannuation Funds) Bill 2020 became law in June 2021, allowing SMSFs to increase the maximum number of members in their fund from four to six from 1 July 2021, running multiple SMSFs may be less attractive.
According to the Explanatory Memorandum for the Bill, the main option for families with more than four members seeking to control their own super investments has been to create two SMSFs or place their super in a large fund. The reform was designed to help large families avoid this situation and include all their family members in one SMSF.
In the wake of the 1 July 2017 super changes, there was considerable media discussion about SMSF trustees setting up multiple funds to get around the new rules. These included:
- SMSFs no longer being able to segregate different assets between tax-free pension accounts and taxable accumulation accounts.
- Introduction of the $1.6 million ceiling or transfer balance cap (TBC) on the amount that can be transferred into the pension phase.
Prior to the new legislation, the capital gain on the sale of SMSF assets (such as an investment property) could be fully assigned to the fund’s pension accounts to avoid CGT, leaving fund members in the accumulation phase protected from the CGT liability.
The ATO was so concerned about this issue that in late 2018 it warned it would closely scrutinise any arrangements where individuals with multiple SMSFs attempted to circumvent the intended reforms. At the time the regulator noted there were around 13,600 trustees with more than one SMSF and 35 trustees with more than five.
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 issue and has flagged that it is actively monitoring the situation. This is linked to the emergence of retirement planning schemes being sold to retirees and prospective retirees to avoid paying super taxes.
Through its Super Scheme Smart initiative, the ATO has repeatedly warned SMSF trustees about the risks inherent in retirement planning schemes. These arrangements attract severe penalties under the tax laws and trustees can lose their right to act as a trustee and to manage and operate an SMSF.
Among the retirement planning schemes attracting ATO attention are “improper use of multiple SMSFs”, particularly those involving “deliberate use of multiple SMSFs to manipulate tax outcomes”.
The regulator has stated: “While the establishment of multiple SMSFs by itself does not give rise to compliance issues, we will examine the circumstances of those cases where it appears that the establishment of another SMSF has been a precursor to subsequent behaviour intended 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.
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 the assets
2. Easing estate planning
Setting up a second SMSF can facilitate the smooth transfer of assets to specific beneficiaries when a member dies. This can help to avoid disputes over the distribution of SMSF assets. It can also help keep super interests separate in the case of a blended family.
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.
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 member may want an allocation designed to deliver a consistent income stream, while a younger member may seek an allocation strategy focused on capital growth. Satisfying both these 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 investment risk than members closer to retirement.
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 Cost of Operating SMSFs 2020 study by actuarial firm Rice Warner and the SMSF Association, annual compliance administration costs for an SMSF in the accumulation phase generally range from $1,189 to $2,453. This includes basic costs such as the annual ASIC fee, ATO supervisory levy, audit fee and cost of financial statement and tax return. If the fund uses a full administration service, the annual cost for a fund in the accumulation phase is generally $1,514 to $3,074.
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 involving multiple SMSFs, running two or more funds definitely has the potential to attract regulatory attention.
It’s legally possible to run two SMSFs, but there are both 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 this type of change can be impossible to unwind at a later date.
The information contained in this article is general in nature and does not consider your personal circumstances.