One-member viability

Is it better to house two members in a single SMSF or run two separate funds for each individual? Michael Hallinan SMSF executive consultant at SuperCentral considers both of these propositions.

Now SMSFs can have up to six members, it is a good time to consider whether they should only have one member. This is not a criticism of the former government’s unexpected but welcome championing of larger SMSFs. This championing was possibly an attempt to future-proof SMSFs against the re-emergence of anti-SMSF policy changes. The Labor Party’s proposal to make imputation credits non-refundable for super funds being an example – a policy that would have had a disproportionate adverse impact on SMSFs compared to other superannuation sectors.

Unfortunately, the impact of the increase in the membership size, made effective on 1 July 2021, from four to six members has not yet flowed through the ATO reporting system and was not captured in the most recent SMSF quarterly statistical report of March 2022. The most recent report only captures data applicable to the 2020 financial year. However, this data does indicate less than 4 per cent of SMSFs have four members, while 23.7 per cent are singlemember funds in respect of the 2020 income year.

The five-year collection period with regard to SMSF membership size is set out in Table 1 taken from the March 2022 statistical report.

The data indicates a very slight increase in the proportion of single-member SMSFs over the collection period with a corresponding reduction in the percentage of multi-member SMSFs. In all years of the report, single-member and two-member funds have accounted for no less than 92.4 per cent of all SMSFs.

The issue to be considered in this article is whether the advantages of single-member SMSFs are sufficient to offset the scale advantages, particularly the initial set-up costs and the recurring costs, of twomember funds.

Table 1: Proportion of funds by number of members (%)

Number 2019/20 2018/19 2017/18 2016/17 2015/16 of members

1 23.7% 23.4% 23.2% 23.1% 22.9%

2 69.2% 69.3% 69.4% 69.4% 69.5%

3 3.4% 3.6% 3.6% 3.7% 3.7%

4 3.6% 3.8% 3.8% 3.8% 3.9%

Total 100% 100% 100% 100% 100%

Case study

To do this we will look at a case study and to make the comparison more robust, the single-member SMSF has Ta corporate structure, while the two-member SMSF has an individual trustee structure. Further, we have assumed there are no member movements – whether inwards or outwards in either fund.

These assumptions clearly favour the twomember SMSFs given the ‘nil cost’ structure of individual trusteeship as against the cost of a special purpose corporate trustee, approximately $800 including the Australian Securities and Investments Commission (ASIC) registration fee of $538. However, once the administration and transaction costs associated with the admission of an additional member to an SMSF with an individual trustee structure, particularly where the fund has one or more direct real estate investments, are taken into account, the corporate trustee structure will represent reasonable value.

The actual case to be used is that of Bill and Mary. The comparison will be based upon a scenario where Bill and Mary each have their own SMSF (with their own single-director/single-member corporate trustee) versus one with Bill and Mary being members of the same two-member SMSF.

Establishment costs

The typical establishment costs of two single-member SMSFs as against a twomember SMSF are set out in Table 2. The costs are illustrative only and not exhaustive.

It would be possible for the same corporate entity to act as trustee of both Bill’s SMSF and also Mary’s SMSF. This could be achieved by setting up B&M Super Pty Ltd with Bill and Mary as the only directors as that entity would satisfy the requirements of section 17A(2)(a)(ii) of the Superannuation Industry (Supervision) (SIS) Act. However, such a cost-saving arrangement would undermine one of the main benefits of a single-member SMSF. Consequently, this cost-saving arrangement will be ignored.

Clearly the single-member SMSFs have no scale when compared to two-member SMSFs and if cost was the only criterion, then single-member SMSFs would be the less satisfactory solution.

Table 2: Typical SMSF establishment costs

Item Two single-member SMSFs Two-member SMSF

Trustee entity Special purpose proprietary company – single director/ Members as trustees single shareholders ($800 each inclusive of ASIC registration fee of $538)

Trust deed $400 ($200 each) $200

Director No fee Not applicable identification numbers

ATO supervision fee (strictly payment of $518 ($259 each) $259 the first-year fee and the prepayment of the second-year fee occur at the same time)

Electronic service $200 ($100 each) $100 address

Professional services – $750 (assumes 50% $500 discount establishing fund for the second registration)

Total $3468 $1059 Per member $1734 Per member $530

Operating costs

The typical operating costs of two singlemember SMSFs compared to a twomember SMSF are set out in Table 3. The costs are illustrative only and not exhaustive.

Again, clearly the single-member SMSFs have no scale when compared to twomember SMSFs and if operating cost was the only criterion, then single-member SMSFs would be the less satisfactory solution.

The above comparisons undoubtedly show the cost savings arising from the scale of two-member SMSFs against singlemember funds.

They do not, however, include irregular costs or occasional costs, such as trust deed amendments. Presumably such costs would not alter the scale advantage of twomember SMSFs.

Table 3: Typical SMSF operating costs

Item Two single-member SMSFs Two-member SMSF (Total cost)

Trustee entity $118 Not applicable supervision fee

Fund administration $2000 $1500 fees

Accounting fees $2000 $1500

Electronic service $200 $100 address

ATO supervision $518 $259 fee

Audit fees $2000 $750

Tax return $2000 $1500 preparation fee

Investment adviser $2000 $750 fees

Bank fees $200 $100

Other $1000 $250

Total $12,036 $6709 Per member $6018 Per member $3355

The case for single-member

SMSFs The case for single-member SMSFs cannot be based solely on cost. Clearly, as shown by the tables, both typical establishment and operating costs would be lower on a per member basis in two-member SMSFs. What then is the rational basis for operating two single-member SMSFs as against a twomember SMSF?

The justification for single-member SMSFs is primarily based upon the desire for and benefits of unadulterated control and splendid isolation. The attributes of control and splendid isolation will be best appreciated by married couples who have had previous relationships. While they may jointly own their marital home, many prefer to keep their super in splendid isolation from their spouse and exclusively retain unadulterated control over their own super.

The benefits of splendid isolation and unadulterated control will be particularly appealing in the situations of relationship breakdowns, mental incapacity and estate planning.

However, there are other benefits of single-member SMSFs. These include the avoidance of a dominant member, the ability to have different investment strategies, the ability to use different advisers and the avoidance of the risk the SMSF will be treated as a foreign trust for the purposes of additional transfer duty or land tax.

As there is no second member in a singlemember SMSF, there cannot be a dominant member; the single member can pursue their preferred investment strategy, the single member can engage their preferred service providers and the risk of the SMSF being treated as a foreign trust is much reduced.

Finally, it may be much easier for the single-member SMSF to have all assets treated as segregated current pension assets than would be the case if there was a second member.

Before considering these benefits of single-member SMSFs, there are other advantages of two-member SMSFs that should, in fairness, also be acknowledged. Two-member SMSFs could have a greater contribution inflow thereby permitting access to investments with minimum investment limits, or to geared investments where the size of expected contribution inflows is a material consideration for any lender under a limited recourse borrowing arrangement.

Relationship breakdown

Where a relationship breakdown occurs, the practical result is usually a significant and prolonged disruption to the proper administration of the SMSF. This disruption is due to the disinclination of the two parties to cooperate due to personal animosity between them or that one party treats the disruption as a bargaining lever for the property settlement.

In these situations the SMSF’s bank account is often effectively frozen as one side declines to provide joint instructions. Commonly, pension payments cannot be made either as investment instructions are not given or the payment is not authorised. Normal end-of-year activities of the SMSF can be suspended or delayed. The SMSF may suffer loss of the earnings tax exemption for failing to pay the minimum pension amount or breach various operating standards. These adverse outcomes will not arise in a single-member SMSF.

While having a single-member SMSF does not immunise the superannuation interest from court-ordered payment splits and does not provide indivisibility of superannuation interests (particularly since recent amendments to both the Family Law Act and Taxation Administration Act permitting Family Court registrars requesting and sourcing information from the ATO about superannuation interests of the other spouse), it will prevent the administration of the single-member SMSF from freezing. If the member is in pension phase, the effective freezing of the administration of the SMSF may render the member without an income.

Mental incapacity

Should a member of a single-member SMSF suffer mental incapacity, the member’s preferred attorney or attorneys could take over management and control of the fund. This can avoid the complication of having a second mentally capable trustee or director seeking to interfere or control the joint SMSF.

Estate planning

Where the member has children from a previous marriage, it can be more easily and effectively prearranged that, upon death, control of the fund moves to these children in a single-member SMSF. This would prevent the member’s second wife from seeking to exercise control or challenging the validity of estate planning mechanisms put in place by the deceased member, such as binding death benefit nominations or reversionary pension nominations, or seeking to exercise any dispositive discretions conferred on the trustee in respect of the death benefit.

Conclusion

There is a good case for single-member SMSFs, particularly for individuals who do not wish to intermingle investment or control or both of their superannuation interests. This would be the case for individuals who are in their second or subsequent marriage. There is, however, an additional cost for this unadulterated control and splendid isolation, but the cost is not too great when compared to the costs incurred when these elements are absent.