Exploring the impacts of allowing six-member SMSFs

Last week’s Federal Budget was mainly about reform for the larger superannuation funds, however, there were a number of issues impacting SMSFs. These confirmed earlier announcements were some of which are currently before the Parliament and have not yet passed as legislation. They included:

• an increase in the age at which the bring forward rule for non-concessional contributions is to operate from age 67;
• changes to the way in which exempt current pension income is calculated from 1 July 2022 for some SMSFs; and
• an increase to the minimum number of members of an SMSF from four to six.

In this article we’ll discuss the increase in the minimum number of members in a SMSF fud. Though it may seem a simple increase, it can involve complex decisions no matter how many members are involved.

The increase from four to six members was introduced to the House of Representatives on 2 September 2020. If the proposed amendment is passed into law, the main change is to the signature requirements for documents and various issues which will currently relate to funds with less than five members, such as the acquisition of some assets from related parties, and the in-house asset rules, as they apply to small funds.

How many members is a good idea?

Irrespective of the maximum members for a small fund, the main question is to decide how many members is ideal given the circumstances. Most SMSFs have one member (23%) or two members (70%), and there are a lot less funds with three and four members. No one really expects that an increase to a maximum of six members of an SMSF will result in a torrent of new funds. Nonetheless, it provides greater flexibility for families with more than four members to benefit from the change. In some situations, there may be special reasons to have up to six members.

No matter how many members are permitted in an SMSF there are pros and cons that apply. This may include the operation of the fund, investment decisions, and paying benefits to members.

Establishment and administration

The main advantages of the proposed increase to six members are:

• larger families are catered for;
• there is most likely a reduction in operating costs compared to a family that would require two or more funds to achieve the same outcome;
• a corporate trustee would be preferred to assist with administration under the one name to cater for members who may join or leave the SMSF; and
• greater ability for the SMSF to qualify as an Australian superannuation fund when one or more members travel overseas for prolonged period, saving in administration costs.
  

Disadvantages of a six-member fund may include:

• ensuring the fund’s trust deed can cater for the increase in member numbers;
• difficulty in the administration of an SMSF with individual trustees;
• reduced efficiencies in decision making; and 
• overall control and management of the fund, for example, the decision of the trustees/members to appoint or remove trustees.

Fund investments

The positives for making fund investments are that the additional investing power of an SMSF with six members should have greater negotiating and purchasing power, and taxation strategies may be implemented more efficiently.

The negatives around fund investments would be the need to for it to be managed properly. In some situations, investment considerations may be indecisive, investment choice may vary significantly due to the members’ ages, and naming conventions may hold up the final decision.

Benefit payments

The main positives from a benefit payments perspective is that estate planning can be streamlined with a greater number of members and the ability to assist with the intergenerational transfer of wealth. This can provide taxation advantages as family members pass through the superannuation fund.

However, some negatives may arise from the increase in members, such as relationship breakdowns between the members in the fund, lack of clarity when it comes to the distribution of death benefits to nominated beneficiaries, and potential financial abuse.

Looking forward to the increase?

The increase in the minimum number of members of an SMSF may not be for every fund, but it may be something others have been looking forward to for some time.