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In the Federal Budget two years ago, then Treasurer Scott Morrison put forward a proposal to increase the number of members in a self-managed super fund (SMSF) from four to six. The proposal followed a recommendation by the Super System Review (or Cooper Review) in 2010 to increase maximum members from four to ten.
The proposal was supposed to come into effect on 1 July 2019, but it fell by the wayside until recently when the Taxation Laws Amendment (self-managed superannuation fund) Bill was introduced on 2 September 2020.
The Senate Economics Legislation Committee has also recently recommended that the Bill be passed. While it may not be passed this year, the expectation is that it will go through early next year, with it to come into effect the first day of the first quarter following its Royal Assent.
Who is likely to use it?
The vast majority – more than 90 per cent – of SMSFs currently have just one or two members so there is no expectation that there will be a run on six member SMSFs as soon as the Bill passes. However, it will be a useful tool for a small cohort of SMSF trustees.
“We don’t expect this change to result in a significant increase in the number of people setting up SMSFs,” SMSF Association deputy chief executive officer and director of policy and education Peter Burgess says.
“We, as an association, have still been supportive of the measure. We think it will provide more flexibility for those individuals in the position to use it.”
Those expected to use it are families with more than two adult children.
SMSFs are often used by families and start off with a couple who want to add children once they become old enough to work and contribute to super. If families have more than two children, then a large fund allows up to four children to be added. It also enables spouses of children to be added if families are not too large.
What strategies would it open up?
Potential benefits to members may include an increase in investment strategies available to the fund, as it now has a larger pool of funds at its disposal.
Pooling funds could open up commercial property investment opportunities to members. This could be particularly advantageous for small and family businesses, wishing to buy business premises – business real property – and lease the property back to the fund.
For more information on purchasing business real property in your SMSF read SuperGuide article 10 steps to buying a commercial property and leasing it to your SMSF.
A larger pool of funds would potentially enable an SMSF to broaden the diversity of investments in their portfolio.
There are also cost benefits to members. Many costs of running an SMSF – such as the annual auditing fee – are flat dollar fees, which means the cost per member will reduce as the number of members increases.
Also, if a family has resorted to running two SMSFs to include all members and can now convert to one SMSF, there will be potential administration cost savings.
Disadvantages
Executive manager at SuperConcepts Graeme Colley says that one of the potential disadvantages of bigger funds is that there are more people involved in decision-making. This can create indecision and difficulties when members have different expectations around risk requirements and income needs.
This adds an extra layer of complexity to the investment strategy of the fund, which now has six members to consider instead of four.
Of course, the more members in a fund, the more probability that one or more will go through a relationship breakdown and may have to divide their super or withdraw from the fund entirely.
Colley also points out that in the case of a family where the children outnumber their parents, there is the possibility of elder abuse, as the younger members could outvote the parents to their potential disadvantage.
Need to know
The SMSF Association’s Peter Burgess says that SMSF trustees wanting to start an SMSF with more than four members – or add more members to existing four-member funds – will have to look at the trust legislation in their individual state. In some states it is not possible to have more than four individual trustees of a trust.
“If that is the issue you will need to move across to a corporate trustee,” he says.
Need to do
Existing SMSF members considering more members should also examine their fund’s trust deeds.
“Some trust deeds are drafted so you can’t have more than four members in your fund,” Burgess says.
The trust deed would have to be amended before the member was added.
There may also need to be amendments to the trust deed around who and how many members or trustees are required to sign documents and cheques for investment purchases and general administration.
The more members required, the longer different processes may take; while the fewer members required, the more opportunities for taking advantage of remaining members of the fund.
The bottom line
Even though it may not be taken up by many trustees, once the legislation is passed it will provide more flexibility for SMSFs who are in a position to benefit from additional members and potentially increase investment opportunities.
If you have an SMSF or are thinking of starting one, we’re interested in hearing what you think of six-member funds. Please complete our poll below and you can see the results immediately.
