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Home / SMSFs / SMSF administration / What you need to know about six member SMSFs

What you need to know about six member SMSFs

December 1, 2020 by Penny Pryor Leave a Comment

Reading time: 3 minutes

On this page

  • Who is likely to use it? 
  • What strategies would it open up?
  • Disadvantages
  • Need to know
  • Need to do
  • Six member SMSFs poll

We’re interested in hearing what SuperGuide readers think of six-member funds and invite you to participate in our poll at the bottom of the article.


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.


Example

Three couples – Joe and Jane, Leisa and Luke, and Adam and Steve – have recently gone into business running a restaurant. The business is going well, and the owner of the building is selling the premise. The six partners are unable to purchase the building on their own, but after talking to their accountants they decide to establish a self-managed superannuation fund. Pooling their superannuation resources gives them enough funds to buy the premise outright, which they then lease back to the business, for a commercial rate of rent.


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.

Six member SMSFs poll

Poll: 6 member SMSFs

Learn more about SMSF administration in the following SuperGuide articles:

Your SMSF calendar

Your SMSF calendar

January 4, 2021

SMSF trustee housekeeping checklist for 2020/21

SMSF trustee housekeeping checklist for 2020/21

June 29, 2020

Guide to the ATO SMSF supervisory levy

Guide to the ATO SMSF supervisory levy

June 1, 2020

The SMSF trustee declaration explained

The SMSF trustee declaration explained

June 1, 2020

Guide to SMSF trust deeds

Guide to SMSF trust deeds

June 1, 2020

SMSF annual admin checklist

SMSF annual admin checklist

April 22, 2020

Top 5 mistakes SMSF trustees make with their annual returns

Top 5 mistakes SMSF trustees make with their annual returns

April 22, 2020

Guide to SMSF administration, reporting and record-keeping

Guide to SMSF administration, reporting and record-keeping

January 1, 2020

SMSFs: What advice can your accountant provide?

SMSFs: What advice can your accountant provide?

December 14, 2019

How to wind up an SMSF

How to wind up an SMSF

December 4, 2019

How to set up an SMSF correctly

How to set up an SMSF correctly

December 3, 2019

How to record SMSF minutes

How to record SMSF minutes

November 3, 2019

Guide to SMSF audits

Guide to SMSF audits

June 14, 2019

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

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

May 2, 2019

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

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

February 11, 2019

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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.

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