SMSFs

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SMSFs

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Volume 13 Issue 03 | 2021

CPD

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Worth a read because:

Before increasing member numbers up to six, SMSF trustees need to understand the implications for the fund decision-making and administration. For instance: Is the current trustee structure suitable? How will voting rights be determined? Will investment strategies change?

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Six member SMSFs

They sound like a sensible idea

Graeme Colley

S

ix member SMSF funds sound like a sensible idea. Put the family in one super fund, make joint investment decisions, help the children save and heaps more reasons. Why not? The Treasury Laws Amendment (Self Managed Superannuation Funds) Bill 2020 (the Bill), was introduced in the Senate on 2 September 2020. It remains before the Senate although the Senate Economics Legislation Committee has recommended it be passed (albeit with the Labor senators issuing a dissenting report). [It has since received Royal Assent].

Among other things, the Bill proposes to amend section 17A(1) (a) of the Superannuation Industry (Supervision) Act 1993 (SIS Act) to require an SMSF to have fewer than seven members (instead of fewer than five) in order to satisfy the definition of an SMSF.

Besides allowing SMSFs to have up to six members, the main change that will occur relates to the signing of a document which will require at least half of the trustees or directors of the trustee company to sign certain fund and regulatory documents. The Bill also standardises the wording used in the SIS legislation so that reference to small funds is consistent.

The best advice about the family SMSF is to ‘look before you leap’, make sure you have done your homework and have concrete reasons for the final decision. Do not forget that if you do not get it right, you and maybe the rest of the family may end up with no safety net and a big mess.

What needs to be done?

• Understand the impact of the increase in SMSF members on decision-making and fund administration. • Appreciate the difficulties that can arise by the increase in SMSF members on investments and benefit payments. • Recognise the benefits of increasing SMSF members from a wealth transfer angle.

Experience shows that the decision to include family members as part of an SMSF can work well, but only in a limited number of cases. If everyone understands the purpose of superannuation, their responsibilities, and respects each other’s views, then it can work without any question.

However, issues can arise when there are differences in members’ ages, and younger family members may lack interest and skills compared to their parents who may be close to retirement. There is also the potential difference in investment choices by members as younger members may have longer investment time horizons than their parents. With those basics in mind, let us have a look at the essential technical requirements of having an SMSF.

The most essential requirement for an SMSF is that, under the current rules, you cannot have any more than four members but if

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the (amending) Bill is passed, that will increase to a sixmember limit. This puts families with five or more out of the question if they are after just one fund. However, it could be possible to have two or more funds for larger families. Maybe mum and dad in one fund and the kids in another.

What to think about?

• Pros and cons of more members in an SMSF. • Review lifestyle considerations. • Establishment. • Investments. • Paying benefits.

Trustee structure is important

The trustee structure of the SMSF is important to enable the fund to be administered properly. The general rule is that all members of an SMSF who have legal capacity must be trustees of the fund or directors if there is a corporate trustee. If the children are under 18, they will need to have mum and/or dad to act in their place as fund trustee as they do not have legal capacity.

In the case of individual trustees, the fund’s trust deed may provide rules relating to the appointment and dismissal of trustees as well as meetings and trustee voting rights. These are important, especially with a family fund, as they will lay the ground rules on who does what and rules about the fund’s operation. It is better to have these rules in writing than just some loose understanding which can be misunderstood when things get hot under the collar.

Voting rights

Voting rights can be important when it comes to decisions about the fund both from the point of view of individual trustees and a corporate trustee. The superannuation legislation requires each member to be a trustee or director, however, it does not stipulate the voting rights of those trustees or how a casting vote operates.

While it is usual that each trustee has one vote, it is possible to have voting rights based on each member’s balance or any other method. If the trustee is a company, in addition to the fund’s trust deed, the constitution of the company may provide rules on directors’ meetings and voting rights.

Member rights on death

It is important for members to ensure that their rights are protected if they were to pass away. This can be protected by the legal personal representative becoming a trustee or a director on the member’s death. Careful wording of the trust deed can ensure this occurs automatically on death. Having the legal personal representative as trustee will help ensure the fund is administered correctly and the benefits are paid according to members’ wishes as provided in the fund’s trust deed. This is very important when it comes to family superannuation funds. Reversionary pensions or BDBNs

To ensure benefits are paid as fund members wish, members may consider providing a reversionary pension to qualifying dependents or make a binding death benefit nomination (BDBN). If a member is receiving a pension at the time of their death which has a reversion to a survivor, they (the survivor) will continue with the pension until their death or they may have the option to convert it to a lump sum and withdraw the amount from the fund.

If there is a BDBN in place then superannuation benefits can be paid to a member’s dependants upon death and/or to the member’s legal personal representative and have the amount distributed according to their Will. Correct legal drafting of these documents will help ensure that the nominations or instructions are not subject to challenge.

The investment side

Then there is the investment side of the fund which is the main thing about superannuation.

Having members of different ages is not an impossible problem to solve as they may all agree on a range of assets that are diversified and take the long-term perspective of the fund into account.

In some situations, if the family is involved in a small business, it is possible to have a business property in the fund which can use superannuation savings effectively by leasing the property back to the family business. In the long term, if the children continue with the business, they may retain the property in the fund as part of an intergenerational transfer of assets which can be tax-effective. Also, assets that are held in a superannuation fund are protected from creditors in the event of a member’s bankruptcy.

Moving benefits

The day will probably come when the children may wish to move their benefit to another superannuation fund, so they can have their family share in the benefit of a family SMSF. This is something that needs to be planned just like the original decision to have the original family SMSF in the first place. This will require decisions concerning the change in trustee or directors of the fund, reviewing investments and investment strategies as well as transferring benefits to the new fund. It is worthwhile seeking advice to ensure this happens as smoothly as possible.

So, there are some things to think about for those thinking about having a family SMSF. Good planning and understanding the reasons for having the fund are essential to avoid any potential mess that may prove impossible, or extremely difficult and costly, to fix.

How many members are a good idea?

Irrespective of the maximum members for a small fund, the main question to consider is how many members is a good idea in the circumstances. Most SMSFs have one

Graeme Colley, SuperConcepts

Colley is executive manager, SMSF technical and private wealth at SuperConcepts. He is a wellknown figure in the SMSF community with a long-standing reputation as an educator, technical expert and advocate for the sector. He has held senior roles in the Australian Tax Office, worked as assistant commissioner for the Insurance and Superannuation Commission, and most recently held the role of director, technical and professional standards at the SMSF Association.

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Volume 13 Issue 03 | 2021

The quote

No one really expects that an increase to a maximum of six members of an SMSF will result in a torrent of new funds. But it provides greater flexibility for families with more than four members to benefit from the change. member (23%) or two members (70%) and there are a lot fewer funds with three and four members.

No one really expects that an increase to a maximum of six members of an SMSF will result in a torrent of new funds. But it provides greater flexibility for families with more than four members to benefit from the change. In some situations, there may be special reasons to have up to six members.

No matter how many members are permitted in an SMSF, there are pros and cons that apply. This may include the operation of the fund, investment decisions and paying benefits to members.

Establishment and administration

The main advantages of the proposed increase to six members are:

• larger families are catered for. • there is most likely a reduction in operating costs compared to a family that would require two or more funds to achieve the same outcome. • more efficient fund administration as a corporate trustee is required for a fund with more than four members to meet the state trustee legislation. • greater ability for the SMSF to qualify as an Australian superannuation fund when one or more members travel overseas for a prolonged period, saving in administration costs.

Disadvantages of a six-member fund may include:

• ensuring the fund’s trust deed is able to cater for the increase in member numbers. • difficulty in the administration of an SMSF due to the number of members involved. • reduced efficiencies in decision-making. • overall control and management of the fund, for example, the decision of the trustees/members to appoint or remove trustees.

Fund investments

The positives for making fund investments are the additional investing powers of an SMSF with six members should have greater negotiating and purchasing power, and taxation strategies may be implemented more efficiently.

The negatives around fund investments also need to be managed properly as investment considerations may be indecisive. In addition, due to the range of members’ ages, investment choice may vary significantly and naming conventions may hold up the final decision.

Benefit payments

The main positives from benefit payments are that estate planning can be streamlined with a greater number of members and the ability to assist with the intergenerational transfer of wealth. This can provide

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Volume 13 Issue 03 | 2021

taxation advantages as family members join and leave the superannuation fund.

Negatives can arise out of relationship breakdowns involving fund members, lack of clarity when it comes to the distribution of death benefits to nominated beneficiaries and potential financial abuse.

Looking forward to the increase?

The increase in the minimum number of members of an SMSF may not be the perfect cup of tea for some, but it may be something others may have been looking forward to for some time. fs

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CPD Questions

Earn CPD hours by completing this quiz via FS Aspire CPD.

1. The primary purpose of the Treasury Laws Amendment (SMSF) Bill 2020 is to:

a) enhance the voting rights for all SMSF member trustees. b) increase the number of allowable members in an SMSF from up to four to up to 10 c) raise the maximum number of allowable members in an SMSF from four to six d) require all trustees to be a signatory on all regulatory documents for their fund

2. Why is it vital to ensure there is careful wording of the trust deed for a family SMSF?

a) To ensure the deed can cater for any increase in member numbers b) To protect each member’s wishes regarding payment of their benefits upon death c) To provide clear rules around trustee meetings and voting rights d) All three options

3. Which of the following statements is offered as the best advice about family SMSFs?

a) When possible, include all family members in an SMSF b) Look before you leap c) Ensure each member has a BDBN in place d) Each member/trustee must have equal voting rights

4. A potential disadvantage of a six-member SMSF would be:

a) increased complexity in fund control and management b) heightened risk of fund non-compliance due to one or more members travelling overseas c) larger size of new investments sought by the fund d) higher operating costs as compared with two smaller selfmanaged funds

5. The majority of SMSFs have just two members.

a) True b) False

6. Current superannuation legislation specifies how the voting rights of trustees for any SMSF are determined.

a) True b) False

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