The government introduced the bill to increase the SMSF member limit from four to six in February 2019. The SMSF Association has recently endorsed the government’s proposal in its submission to the Senate, claiming it will provide additional flexibility and choice within the current retirement saving system. With Labor in opposition to this measure, it is unknown whether this will get through parliament prior to the federal election.
Statistically speaking, approximately 92% of SMSFs have one to two members, leaving a small percentage of SMSFs with only three or four members. Due to the current four-member limit, it has not been practical for families to set up SMSFs, as typically there will be one child or family member who misses out on membership. In addition, advisors have been reluctant to appoint children as directors or trustees of their clients SMSFs due to administrative and control difficulties.
Should Labor’s franking credit refund policy come to fruition, the ability to add additional members an increase in the taxable income of an SMSF could be an avenue to fully utilise the franking credits.
Let’s look at some pros and cons surrounding increasing SMSF membership from four to six members:
- Opens up SMSFs to larger families allowing the appointment of four children or family members
- Pooling of fund assets between 6 members opens up investment options, increases the ability to diversify and increase cash flow through contributions
- More likely for an SMSF to meet the Australian Super Fund definition, which makes it easier for members to live overseas. Advice should always be sought in relation to this
- Increased membership reduces proportionate costs for members
- Increases life of fund and better positions fund for exiting older members
- If individual trustees elected with 6 members, administration costs would increase by means of maintaining correct asset registration
- Elder abuse through SMSFs by other family members in the fund
- Too many trustees or directors could reduce funds ability to make decisions effectively
- Increased risk on the impact on fund due to the death of a member or relationship breakdown
Whether the bill gets through parliament or not, the above points are all still valid in relation to appointing children or additional family members under the current four membership limit.
Any clients looking to increase their SMSF membership should seek specialist advice and be fully briefed on the pros and cons.