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From 1 July 2021, the maximum number of members a Self Managed Super Fund (SMSF) can have increased from four to six. This change, enacted by recent laws, also applies to small APRA funds. While the use of six-member SMSFs is likely to be limited, it provides additional choice and flexibility for certain groups.
Family Groups
Six-member SMSFs offer family groups a vehicle for controlling superannuation savings and investment strategies. Previously, families with more than four members had to create two SMSFs, incurring extra costs, or place their superannuation in a large fund. A larger SMSF also offers protection if a member travels overseas for an extended period, as residency rules require 50% of members, measured by market value, to be in Australia.
Estate Planning
The new laws benefit estate planning, particularly for tax-effective intergenerational wealth transfer. For example, a family business holding commercial property in their family member SMSF can maintain the property within the SMSF if the parents die, allowing the children to continue running the business. Holding assets within the SMSF also provides protection from creditors.
The Problem Areas
Investment Decisions
Problems can arise when members of a member SMSF have different investment needs and goals. For example, parents who are nearing retirement may prioritize stable, income-generating investments to preserve their capital and ensure a steady income stream. On the other hand, younger members, such as their children, might focus on long-term growth and be more willing to take on higher-risk investments. This divergence in investment strategies can create conflicts within the member SMSF, as the fund’s overall investment strategy may not align with everyone’s individual needs and preferences. To address this, it is crucial to establish a clear and flexible investment strategy that considers the varying risk tolerances and financial goals of all members.
Disputes
The more members in a member SMSF, the greater the potential for disputes. Disagreements can arise over investment decisions, the management of the fund, and the distribution of benefits. To mitigate these risks, it is essential to have clear rules and procedures in place. This includes well-defined processes for the appointment and dismissal of trustees, voting rights, and the conduct of meetings. Establishing a formal dispute resolution mechanism can also help manage conflicts effectively. Regular communication and transparency among members are key to maintaining harmony and ensuring that all members are on the same page regarding the fund’s operations and objectives.
Death of a Member
When a member of a member SMSF dies, it is vital to ensure that their wishes are respected and that the transition is handled smoothly. This involves several steps, such as appointing a legal personal representative as trustee to manage the deceased member’s interests in the fund. Additionally, implementing reversionary pensions can provide a seamless transfer of pension benefits to a nominated beneficiary, ensuring that the deceased member’s dependents continue to receive financial support.
Binding death nominations are another important tool, as they allow members to specify how their superannuation benefits should be distributed upon their death. These nominations are legally binding and can help prevent disputes among surviving members and beneficiaries. Proper estate planning within the member SMSF is essential to ensure that the deceased member’s intentions are honored and that the fund continues to operate effectively.
Who Cannot Have a Six-Member SMSF?
Not all SMSFs can allow six members. In some instances, state legislation limits the number of individual trustees a trust can have to less than five or six (e.g., Queensland). In these cases, fund members might opt to use a corporate trustee for their member SMSF.
Administrative Impact on a Member SMSF
The change from four to six members updates the definition of an SMSF, impacting other Acts and Regulations. Sign-off requirements for an SMSF’s accounts and financial statements will change. Currently, if an SMSF has more than one director member, its accounts and statements must be signed by at least two members in their capacity as individual trustees or as directors of a corporate trustee. For SMSFs with three or four members, at least half of the members must sign its accounts and statements for an income year.
Under the updated requirements, an SMSF with one or two directors or individual trustees must have its accounts and statements signed by all of those directors or trustees. For all other SMSFs (those with between three and six directors or trustees), the accounts and statements must be signed by at least half of the directors or individual trustees.
The increase in the maximum number of members for a member SMSF from four to six provides more flexibility and options for family groups and estate planning. However, it also introduces potential challenges in investment decisions, disputes, and administrative requirements. Understanding these implications is crucial for effectively managing a six-member SMSF.
For more information on the rules of regulations of SMSFs, visit the ATO or speak to one of our experts.
