SMSFs to Extend Boundary for Six

Large families disadvantaged by current SMSF member limits may get their chance to add extra members, with the government vowing to increase the maximum number to six, writes Pride Advice’s Azlin Lutfi.

The government remains committed to amending legislation to allow self-managed superannuation funds (SMSF) to include up to six members, despite push back from the Opposition.

Currently, the maximum number of SMSF members permitted is four, which potentially disadvantages larger families by forcing them to exclude children and curbing their ability to manage the intergenerational transition of lumpy, illiquid assets like business interests and commercial property.

However, in February, Assistant Minister, Senator Jane Hume confirmed that amending the limit from four to six was still an important priority for the government.

Senator Hume’s comments followed the government’s decision in mid-2019 to drop the controversial amendment from the Treasury Laws Amendment (2019 Measures No 1) Bill so not to delay the Bill’s swift passing.

From 4 to 6; who stands to benefit?

Couples with three or more children who have an SMSF or plan to establish an SMSF may benefit from the proposed change.

It would give them the flexibility to include more, if not all, of their children.

Key benefits of having more SMSF members include:

  • Economies of scale and the ability to spread costs out, given most of the costs associated with establishing and running an SMSF are fixed;
  • Higher funds under management (FUM) leading to better access to capital and investment opportunities, for example, SMSFs with over $2.5 million in FUM qualify as wholesale investors;
  • Greater capacity for family members to be included in their parents’ financial affairs and estate planning matters;
  • Cashflow benefits by using the contributions of younger members to make pension payments to members in retirement phase without the need to sell illiquid assets; and
  • Ability to manage the preservation or transfer of long-term assets from one generation to another.

These benefits sound attractive but very few SMSFs have more than two members, and for good reason.

Potential pitfalls

Of Australia’s 584,802 SMSFs, around 70% have two members and 23% have a single member1. Four-member funds; the cohort most likely to take advantage of changes allowing additional members, represent only a fraction of SMSFs.

At Pride Advice, of the 200 or so SMSFs we look after, only 1-2% are four-member SMSFs and around 8% have three members.

Recently, one of our clients requested to be removed from the SMSF his parents established when he was a teenager.

He had reached a stage in his life (he was around age 40) when he wanted to separate his financial affairs from his parents. As the third wheel in the SMSF, his parents made all the investment decisions and he had no voting power. Furthermore, he had part of his super in another fund.

This case highlights common problems with SMSFs. When establishing an SMSF, many parents want to include their teenage / young adult children, however, they fail to adequately consider the potential implications.

Once children reach a certain age and stage in life, they understandably may not want their parents involved in their financial affairs.

They also have different risk appetites and investment goals. For example, younger members in accumulation phase tend to focus on capital growth while older members usually have a greater need for liquidity and tend to focus on income.  

Parents also don’t want their children telling them how to invest their money. This can be extremely problematic in situations where one parent passes away or becomes incapacitated, leaving the remaining parent with diminished voting power and the need to negotiate with the kids.

It is important to consider these scenarios because removing a member from an SMSF is a complex process that requires majority consent before funds can be rolled out, not to mention the hurt and stress it can cause.

Given more members inevitably means more complexity, six member-SMSFs are guaranteed to be an administrative challenge.

As children get older, move out and have lives and families of their own, it’s hard enough to coordinate diaries for birthday celebrations and Christmas let alone find time for quarterly SMSF trustee meetings.

Most families would prefer to spend precious moments together talking about life not formulating investment strategies and negotiating parameters.

That said, in certain cases, it may make sense to take advantage of potential changes to the SMSF member limit rule. Before making any decisions, it is important to seek professional advice and understand the potential implications including the likely need to update your SMSF Trust Deed.

For more information, don’t hesitate to contact Azlin on 02 9222 1422 .

  1. As at March 2019. Source: Australian Taxation Office https://www.superguide.com.au/smsfs/smsfs-lead-the-super-pack-again