SMSFA

Six-member SMSFs proving popular

JOHN MARONEY is chief executive of the SMSF Association. It’s early days, and the evidence is only anecdotal, but like many we have been surprised by the number of SMSF trustees expressing interest in adding extra members to their funds. The catalyst has undoubtedly been the recent increase in the maximum allowable number of SMSF members.

The consensus in the SMSF sector before the legislation allowing funds to increase their maximum membership from four to six became law on 1 July, was this reform would have minimal appeal. After all, the overwhelming number of the 580,000 funds at 30 June 2020 had two members.

It appears, almost without exception, those SMSF trustees most interested in adding additional members are trustees reaching an age when they no longer have the desire or capacity to run their own fund. Not only do these trustees want to add their middle-aged children to their fund, but they also want their children to take over its operation and management. The SMSF Association is on the public record as saying we don’t think the increase to six will cause a significant increase in SMSFs being established, but what we might see, based on this anecdotal evidence, is new members joining existing funds.

Arguably, they could have done this even when the maximum number of members was four, but the increase to six seems to have generated renewed interest in adding family members. It’s also interesting when you look at the ATO statistics as they show the proportion of SMSF members in the 75 to 80 and 80-plus age groups, as a proportion of all SMSF members, has been steadily increasing each year for the past five years.

So, it seems the stars are aligning, that is, the rules have changed to allow more members in an SMSF at the same time the cohort of members over the age of 75 is working its way through the system. These members still have substantial balances in their fund and they don’t want their SMSF to be closed. But they do want help running it and they are seeing increased membership as one solution.

The advantages are obvious. Costs are spread across more members and hence would reduce as a percentage of assets. The need for multiple funds and the duplication in costs that come with the previous member limit should decline. Younger adults joining a family SMSF will enjoy lower costs, while the pooling of member funds will allow for greater investment diversification and choice.

By facilitating family SMSFs, it will benefit parents wanting to help with their children’s financial education or simply allow them to invest in their superannuation as one family. This would be particularly helpful for intergenerational family businesses, as well as potentially assisting with estate planning.

Those pluses must be weighed against the potential minuses. With more decision-makers around the table, it seems fair to assume this process will be more difficult and there will be more disputes. So how decisions are made and who will make them become increasingly important issues as the number of members increase.

Of course, the underlying principle of an SMSF is all members of the fund are also the trustees or the directors of a company that acts as the trustee of the fund. So all members have a say over how the fund is run and managed. However, the legislation also allows members to appoint others, including other members of the fund, to act in their place as a trustee or director of the corporate trustee. As such, the use of enduring powers of attorney and other options that convey additional voting rights to one or more members of the fund need to be carefully considered.

With additional members in the fund, divorce proceedings could become even more problematic. Trustees may be required to sell assets in these circumstances, potentially resulting in taxation liabilities that will impact all fund members. In some cases, the outcome can be the forced sale of assets the other members do not want to sell.

Even in the absence of divorce proceedings, the acquiring and selling of assets has the potential to spark conflict. A retired couple might have a more conservative view on asset allocation compared with their children in the accumulation phase. Remember too, it is now a statutory obligation that all the investment and expenditure decisions they make must be in the best financial interests of all members or beneficiaries of the fund.

They will also need to consider if their trust deed needs to be updated to allow for additional members, as well as whether the fund’s investment strategy needs to be reviewed and changed with the inclusion of more individuals, possibly including different investment strategies for different members.

But perhaps the biggest potential drawback will be around cognitive decline and the issue of elder abuse. It will be critical advisers ensure their clients have the cognitive capacity to understand the risks associated with adding additional members to their fund. Indeed, in all matters related with an increase in fund size, it would seem specialist advice is paramount before any decisions are made.