Six member funds – what you need to know

In June 2021, the Treasury Laws Amendment (Self-Managed Superannuation Funds) Bill 2020 received royal assent, which means that SMSF funds will be able to expand to six members from 1 July 2021. Before adding new members to your fund, you need to ensure that you understand the risks and benefits. You should only expand your SMSF if you have solid reasons to do so.

Let’s start with the benefits!

  • The change will provide greater cost efficiencies with set-up costs, levies and audits spread across more members. In addition, an increase in an SMSF’s balance will help cut costs as a percentage of assets. It may remove the need for multiple funds.
  • Members can become long term family wealth creators. SMSFs are not impacted by the rule against perpetuities. The SMSF may be a good structure to maintain family assets such as a farm which can be maintained by the next generation.
  • With more members, there is an ability to have a larger capital base. Under the current total super balance, a new six-member fund could have $10.2m invested.
  • Younger members may be access to better salary continuance, death and TPD insurance that their current industry or retail fund does not provide.
  • Younger members can help with the fund’s liquidity issues faced from having a high allocation of direct property.

What are some of the pitfalls?

  • With differences in member ages, you may also find differences in member skills, interests and risk appetites. All members over 18 are likely to have the same voting rights as their older and much wealthier parents. Without the agreement of all members around the administration of the fund’s investments (the primary reason for having a SMSF), disputes may occur and the fund may be exposed to high-risk investments that are not appropriate for all members, such as those in the pension phase. Appointing a financial planner to oversee the investments of the SMSF would be sound decision. An adviser has the skill and knowledge to allocate the investments appropriately in accordance with the risk profile of all the members.
  • You need to check whether your deed allows for six members. If not, you can simply update it.
  • Some states do not allow trusts to have more than four trustees. If this is the case, a corporate trustee will overcome this issue. A corporate trustee also makes registering investments easier.
  • With more members, there is an increased risk that you may have a forced sale due to a family court settlement. This may result in realising capital gains earlier than planned.

What else do you need to consider?

  • There are new signing rules in place for all funds with more than two members and the accounts must be signed by at least half of the trustees/directors.
  • You will not be able to update your member details on the Australian Business Registry until mid-August 2021. There is a paper form NAT3036 available to use in the interim.
  • Make sure you have your estate planning documents in place. BDBN and reversionary pensions will become much more important to prevent against elder abuse. It would also be prudent to ensure you have an enduring power of attorney in place in case of a trustee losing capacity.
  • You may wish to consider making the legal personal representative a trustee upon death. This will ensure the members’ interests are protected after death. A well-documented trust deed can ensure this occurs automatically.
  • Children under 18 can join the fund, but they cannot become trustees or directors. You will need a parent to act in their place until they reach legal age.
  • Maintaining compliance may be more difficult if members are in different households and do not make unilateral decisions.
  • Currently, only funds with fewer than five members can invest in a s13.22C unit trust. In theory, by adding more members any s13.22C unit trust will become an in-house asset if the SISA is not amended.

Based on current statistics, around 23% of SMSFs have one member and 70% have two. Demand for five or six member funds is unlikely to be high. Before increasing membership in your funds, we recommend that trustees seek specialist SMSF advice.

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