Want to “upsize” your Self-Managed Superannuation Fund (SMSF)?
Effective 1st July 2021 the maximum members for an SMSF has increased from four to six!
In short, additional flexibility and choice. Specifically:
· Lowering of costs – an SMSF typically has fixed administration and operating costs (eg. accounting, audit, legal & actuarial fees) whereas Industry & Retail Superannuation Fund’s charge on a percentage of the account balance.
· More effective taxation outcomes – a pension member can use their franking credit tax refund to offset the tax on the accumulation member’s contributions.
· Greater Investment Opportunities – pooling up to six people’s Superannuation together increases the investment options. The higher fund balance may allow the acquisition of a large / lumpy asset (eg. Real Estate), increase access to unlisted / sophisticated investments and may also allow for more effective diversification of assets.
· Education & Financial Literacy – allows for educated and experienced investors to run and make decisions with less experienced investors, passing on knowledge.
Some Practical Applications of Six-Member SMSF’s
· A successful business with six owners wishes to acquire a non residential property within Superannuation. The six owners could establish a six-member SMSF to facilitate the acquisition of the property. The business could then lease the property from the SMSF on arm’s length and market terms.
· Mum & Dad have three children and wish to assist and guide them to build their own wealth. The three children are admitted as members of the SMSF and together with Mum & Dad they are responsible for the day to day operation and investment decisions of the SMSF.
· Two children and their spouses have recently taken over the family farm. One of the lots that the farm operates from is owned in their parents’ SMSF which they wish to pass onto their children as part of their estate planning. The two children and their spouses are admitted as members of this SMSF, bringing the total members to six. They rollover and contribute to the Fund, whilst Mum & Dad draw down a pension. Over time, as Mum & Dad’s wish of the property going to their children as part of their estate has been achieved as their reduced balances effectively pass the farming land to their children now.
What are the risks?
· All members must be trustees and they are all jointly and severally liable for the operation of the SMSF. So if one trustee accidentally withdraws money from the SMSF bank account and is reported as a breach by the SMSF’s auditor, then all trustees are jointly liable for the repayment of the amount and any penalties imposed by the ATO.
· It can be difficult to split in the event of a relationship or business breakdown, especially if a large proportion of the SMSF is held in real property. Remaining members may need to make contributions or be forced to sell the asset. Agreements put in place at the time that the six-member fund is created can mitigate these risks.
What hasn’t changed?
All members must also be trustees or directors of the corporate trustee, so any new members are responsible for the day to day running and operation of the SMSF.
A corporate trustee is likely to be required for six-member SMSFs. For example, in Western Australian law regulating the maximum number of individual trustees has not changed. This remains at four, so any SMSF that is established and controlled in Western Australia will be required to have a corporate trustee (with each of the members being Directors).
Overall, the six-member SMSFs have increased the opportunities and lowered costs for family groups and small to medium enterprises in relation to their Superannuation.
MGI Perth Financial Services Pty Ltd is a Corporate Authorised Representative No. 1245590 of the SMSF Advisers Network Pty Ltd, ABN 64 155 907 681, AFSL No. 430062