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The benefits and risks of 6-member SMSFs

Recently the maximum number of members to form part of a self-managed superannuation fund (SMSF) and small APRA funds was increased from four to six.

The Treasury Laws Amendment (Self-Managed Superannuation Funds) Bill 2020, which resulted in this increase in fund member sizing as of 1 July 2021, is also responsible for extending the eligible age of the bring-forward provision from under 65 to under 67.

While the majority of SMSF funds are one to two members (over 90%), increasing to a six-member fund may offer increased flexibility, reduce costs and even welcome younger members into the fund. However, in some circumstances making this change may have adverse impacts on decision making.

It’s worth exploring the potential advantages of increasing the members of an SMSF, as well as the potential risks, so you may be best informed about which option may best suit your financial situation and, in many circumstances, your family.

The benefits of 6-member SMSFs

Firstly, let’s take a look at the potential cost-saving and investment advantages of increasing your self-managed super fund membership.

●       Includes growing family

As mentioned above, the majority of SMSF funds are operated with 1-2 members, so it is likely that this change may be more readily adapted by families, particularly those with more than two children. By increasing the maximum members of an SMSF from four to six, allows for multiple children to be added, or even the spouses of children. This allows larger families to grow their retirement savings together, without the exclusion of some family members and dependents.

●       Increase available funds

A key advantage of increasing the member size of any SMSF is the accessibility to a larger pool of funds. By increasing the available funds, you may be able to boost your potential investment strategies and diversify your investment portfolio. For example, by increasing the number of members, you may now have enough funds to purchase a business real property which can be leased on an arm’s length basis to a family business.

●       Cost benefits

It is worth considering the potential cost savings to the fund by increasing the number of fund members. A number of ongoing costs associated with operating an SMSF are flat dollar fees, such as annual independent audit fees.

By increasing your membership, you may decrease the cost-per-membership of your SMSF. Any additional expenses that come along throughout the financial year will be divided amongst more members. Further, if a family is spread across two or more SMSFs due to membership size constraints, the move from a four- to six-member SMSF may allow you all to consolidate SMSFs and further reduce administrative costs.

The risks of 6-member SMSFs

It is important for trustees to consider the potential disadvantages of increasing your SMSF membership, particularly if you currently have only one or two members.

●       Disputes

Arguably the biggest downside to increasing your SMSF membership numbers is finding the balance between decision making and inclusivity. The more members you bring into the fund, the more opinions that will be offered for daily operations and strategic decision making of the fund. This can be particularly confronting for single member SMSFs considering expanding.

It’s also worth keeping in mind that by bringing in new members, you may change the dynamic of the decision-making process within the SMSF. It is critical that the decisions of the trustees are for the sole purpose of providing financial benefits to members in retirement and their beneficiaries on passing. Relationship issues may arise by introducing new fund members to an SMSF which could disrupt the sole purpose obligations of the trustees.

Examples of relationship concerns could be elders are outvoted by younger more competent children, one family may hold a majority membership which could affect the results from voting or even financial abuse surrounding estate planning.

As with any major financial decision when involving family, ensure that a high level of trust and open communication is involved with all participating members.

●       Additional paperwork

Your SMSF trust deed will generally need to be reviewed every five years to ensure it is up-to-date. However, by introducing additional members into the SMSF, you may need to make deed amendments around the number of members or trustees allowed, as well as update who is approved to sign documents and take other administrative actions for the SMSF. This can understandably become a time-consuming and costly process.

How to add members to your SMSF

Making the decision to expand the members within your SMSF is not one that you or your fellow members should make lightly. It may be more beneficial for those operating a family-run SMSF, or those looking to improve their funds total asset position.

If those within the SMSF have weighed up the potential pros and cons of expanding and want to proceed with introducing new members, here is a summary of certain steps to take.

In Australia, new members of a SMSF will need to:

1.      Consent in writing to joining the SMSF fund. This is generally in the form of an Application for membership minute.

2.      The member must become an individual trustee or director of the funds trustee company. This is generally in the form of a Consent to Act as Trustee/ Director of Trustee company minute.

3.      Sign and submit a trustee declaration form from the Australian Taxation Office (ATO)

Further, both the new and existing members must document these changes within minutes of trustee meetings which should be agreed to and signed by all parties. To advise the ATO that you’ve made changes to the SMSF, you simply need to make these changes online through your accountant, over the phone with the ATO or by lodging the change of details for superannuation entities (NAT 3036) form.

The ATO will assess the eligibility of each individual to determine their capacity to act as a trustee of the fund. A trustee could be denied if they are currently bankrupt or insolvent, have been convicted of a dishonest offence or have been issued with civil penalty orders.

For SMSFs with a corporate trustee, the process of adding new members is relatively straightforward as the title of assets may not need to be changed or updated. You will need to add any additional members as director of the corporate trustee, as well as notify the ATO and ASIC (if the latter is necessary). For SMSFs with individual trustees, this process can become time consuming and potentially expensive, as asset title information will need to be updated to include the new individual trustee details.

By working with a dynamic Auditing company, like National Audits Group, we will review your establishment documentation upon introducing a new fund member and confirm compliance with the relevant SIS legislation. In addition, we will provide guidance with regards to trustees ongoing obligations.

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