SISFA

Should you pursue a six-member SMSF?

MIKE GOODALL is a board member of the Self-managed Independent Superannuation Funds Association. The legislation increasing the maximum allowable number of members in an SMSF from four to six has passed both houses of parliament and is now law.

Since 1 July, SMSFs can now have anywhere between one to six members. The usual trustee/ member rules, which broadly require each member to be a trustee/director of the corporate trustee and vice versa, continue to apply. However, the new maximum of six members will potentially allow larger families to include all family members in one SMSF.

The Self-managed Independent Superannuation Funds Association (SISFA) was supportive of this bill when asked for feedback in September 2020 as we believe this change will be beneficial for larger families who want to invest their super benefits together. In particular, it will allow such SMSFs to lower costs and increase their scale and efficiencies to better enable such family members to provide for their retirement. For example, where some families currently have multiple SMSFs due to the previous four-member limit, they will now be able to have a single SMSF.

Other benefits include the ability to access investment opportunities the greater scale will afford, such as wholesale managed funds or property purchases, and thus greater diversification.

However, there are some things to consider when increasing a fund’s membership to five or six members and these include: • that the SMSF trust deed allows more than four members as many deeds hardcoded the previous member limit, • the importance, and in some cases the necessity, of having a corporate trustee. Having a corporate trustee is actually the only solution for many six-member funds as most state laws governing trusts only allow for a maximum of four individual trustees, • for unrelated people in the same SMSF, having an exit strategy if there is a dispute, • being prepared for the death of a member and liquidity issues with paying out death benefits, • what is the risk profile of the various fund/ family members? The older members may be

more risk averse, while younger members are willing to invest in in higher-growth assets and so this difference in investment and timing of exit strategies may add complexity and cost to the fund, and • how the control of an SMSF is structured, for example, an SMSF with two parents and four children will result, without proper structuring, in the children outvoting the parents.

A very small percentage of funds actually have more than two members currently, so significant changes are not expected, but the new rules do allow for greater planning for families looking to take a more holistic approach to retirement planning as a single unit.

Family funds that hold large assets, such as real estate, for tax-effective reasons, may now take advantage of having other members of the family joining, allowing the SMSF to maintain these assets when the parents draw down in their retirement. Under the old rules this strategy was less likely to succeed.

Also passed recently was the bill extending the qualifying age for the non-concessional contribution bring-forward rules to 67. This will allow individuals aged 65 and 66, subject to prescribed total super balance thresholds, to make up to three years of nonconcessional contributions in a single year. Previously this was only available to individuals under age 65 during the relevant financial year. This change is effective from 1 July 2020 onwards.

The recent May federal budget announcements also included a proposal to have the nonconcessional contribution bring-forward rule apply up to age 74. This will allow individuals up to age 74 to use the bring-forward rule without having to meet the work test, provided they satisfy the usual eligibility criteria. Most of the budget measures, including this one, are due to take effect from 1 July 2022.

After a long period of relative inaction on these measures we are finally seeing greater flexibility becoming available for SMSFs. While the ability to now have up to six members in an SMSF offers greater flexibility, it won’t suit everyone and you should seek professional advice in considering the options.