Did you know that SMSFs may soon be able to have up to six members? A large member group in an SMSF creates a number of important planning issues that need to be carefully managed
. But for the right SMSF investors, a large fund may offer considerable investment, cashflow and tax advantages.
Keen SMSF investors are watching with interest the government’s proposal to increase the maximum allowable number of members in an SMSF from four to six, with effect from 1 July 2019. The measure, which is currently before Parliament, will increase flexibility by allowing more members to pool their superannuation savings within one fund.
Having up to six SMSF members could offer real benefits for the right sort of family or group. Consider the case of Mum and Dad, who are in retirement phase and unable to make contributions because they are aged over 65 and no longer meet the “work test”.
Admitting several adult children, and potentially their children’s spouses, who are younger and able to make contributions (eg through a salary sacrifice strategy) may significantly improve the cashflow position of the fund.
Pooling benefits of a large number of members can also enable the trustees to scale up investments – for example, to purchase a large commercial property used in the family’s business. Family groups may also be able to achieve lower administrative costs by establishing one SMSF for up to six members, rather than two or three separate SMSFs.
Admitting additional, younger members to an SMSF could also provide relief for retirees who may be disadvantaged by Labor’s proposal to end cash refunds of excess imputation credits. In this scenario, the excess credits could be used against the tax liability created by the younger members’ taxable contributions.
Despite these advantages, operating an SMSF with up to six members would create some significant planning issues requiring careful thought, including the following:
- All members of an SMSF must be a trustee (or director of a corporate trustee) and must take their trustee responsibilities seriously. Additional new members, such as younger adult children admitted to “Mum and Dad’s fund” for tax planning reasons, would need to be aware of their trustee duties and the penalties they might face for non-compliance.
- Trustee laws in some Australian states limit the maximum number of individual trustees allowed to four or five. In these jurisdictions, SMSFs with six members would need a corporate trustee, with each member appointed as a director of the company.
- The impracticalities of decision-making with up to six individuals involved could make operating the SMSF difficult. For example, consider a situation where “Mum and Dad” are outvoted by four younger members, or where members from two different families in the same SMSF disagree about major decisions.
- Events like death and divorce can kick up tricky issues when many members are involved. When a member dies, by law their superannuation benefits must be paid out as soon as practicable. This may require some investments to be sold, which may become a source of disagreement among surviving members. Similarly, a divorce (or breakdown of a de facto relationship) may lead to one or more members exiting the fund.
Anyone considering a large SMSF should get professional advice before proceeding to ensure they understand how matters like trustee disputes and major life events could affect the fund, and to plan for these contingencies where possible.
Thinking about expanding?
The six-member SMSF proposal is not yet law, but even if it does not proceed there may be benefits for some two-member funds in expanding to three or four members. Talk to us today about whether a larger SMSF could help you achieve your retirement goals.