The idea of allowing up to 6 members in an SMSF has been around for a while. The relevant legislation came into effect from 1 July 2021. What does it mean?
This move to increase the maximum number of members of an SMSF from four to six was first announced in the 2019 Federal Budget, but legislation has been delayed, first by the 2019 Federal Election, and later by the priority given to dealing with COVID-19. The relevant Bill finally received Royal Assent on 17 June 2021 and came into effect from 1 July 2021.
While the Bill was being considered by the Senate, the Senate Economics Legislation Committee undertook an inquiry into the proposed change. The Committee has published the submissions made in relation to the Bill. These divide along predictable ideological lines. The ACTU condemned the Bill, saying it will “exacerbate the misuse of superannuation as a vehicle for tax avoidance and intergenerational wealth transfers”, while organisations representing the SMSF industry and investment planners praised the change. The Committee itself also split into party lines. While the majority recommended the change, the two Labor Senators on the Committee opposed the Bill.
An SMSF that wishes to increase its membership above four will probably need to have a corporate trustee, as the Trustee Acts in New South Wales, Queensland, Victoria, Western Australia and the ACT currently limit the number of individual trustees an SMSF can have to four. There may also be problems in registering up to six joint holders on a company’s share register.
One of the arguments advanced in favour of increasing the limit to six members is to allow large families to all belong to a single SMSF. Supporters argue that this would result in lower administration costs per head and larger asset pools leading to a greater choice of assets. But it is not clear how much demand there really is for such a change. According to the ATO, approximately 93% of SMSFs currently have only one or two members.
There are also important issues that should be considered by SMSF members who are parents before they include their children as members of the fund. Different generations are likely to have different risk profiles and investment preferences. Older parents are likely to be more risk averse than their adult children, and this must be taken into account in the fund’s investment strategy. Control of the fund is also a major consideration. Most “off the shelf” trust deeds and company constitutions provide that each member will have an equal say at trustee meetings. This might be in conflict with the relative balances held by parents and children in the fund. It is also worth remembering that while a parent can invite an adult child to join an SMSF, the law doesn’t provide any mechanism for forcing the child out again if the relationship sours.
Of course, there might also be positives. As parent trustees age, they might welcome the involvement of competent adult children in the running of the fund.
The legislation also provides that at least half of individual trustees and trustee directors must sign certain fund and regulatory documents, such as the annual trustee statement accompanying the financial statements.
If you believe you might want to add additional family members to your SMSF, we recommend that you seek the advice of your Nexia advisor so that you fully understand the pros and cons of such a move.