Did you know that the maximum number of members of a Self Managed Superannuation Fund can have increased from 4 to 6 on 1 July 2021?
Regularly I am asked the question “Should we as a family pool our superannuation resources and establish a Self Managed Superannuation Fund (SMSF)”?
An SMSF commonly has two members, principally being husband and wife, but now the fund is permitted to have up to 6 members.
Well in order to answer the question above let’s explore the various advantages and disadvantages of adding family members, specifically your children to your superannuation fund.
Advantages
Cost: The main costs of an SMSF are essentially fixed costs, that is, the accounting fee, tax return, audit, establishing the investment strategy and preparing the relevant annual minutes of the meeting by the trustee(s). By tripling the number of members, it would be highly unlikely that the fees for the SMSF compliance work would triple.
Pooling resources: By pooling funds, the superannuation fund may be able to buy an asset such as an investment property in the SMSF. Without pooling their resources the members may not have sufficient funds to execute the acquisition.
Liquidity: Many SMSFs have enough cash in their SMSF to finance the deposit for say an investment property, but little or no cash remaining to pay for repairs, special levies and minor improvements. By adding additional family members, the SMSF will have more financial resources to finance such expenses.
Diversification: The bigger the financial asset pool of the SMSF the greater the opportunity to invest in different asset classes such as property, fixed interest, Australian shares, International shares, term deposits etc.
Transfer of Intergenerational Wealth: As parents age, if all family members belong to the same SMSF, it makes it simpler to transfer assets to the next generation. Take for example, where the SMSF owns commercial property that the family business is run from and the next generation intends to maintain and grow that business.
Disadvantages
Different investment objectives: Depending on the trust deed it may be possible to run different investment strategies within an SMSF. For example, the parents may opt for a more conservative approach whilst the comparatively younger children may opt for a more aggressive or riskier approach. However, even though the deed may permit it, from a practical perspective the assets still require segregation which is sometimes easier said than done.
Family Conflict: Each member of the SMSF is to be a trustee or a director of the trustee company. Depending on the family dynamics and personalities, will all family members agree on the investment decision of the superannuation fund?
Change in circumstances: This can be a problem where one of the children who is a member of the family SMSF gets married and chooses to set up an SMSF for themselves. This member may choose to transfer his superannuation interest from the family fund to his new fund. In this case, assets may need to be liquidated in the family superannuation fund to free up cash to transfer to the exiting member. If the assets are mainly invested in ‘lumpy assets’ such as land and building or business premises they may need to be sold in order to transfer out the exiting members’ benefits. Not only can this cause cashflow issues but it may realise a capital gains tax liability.
Lack of privacy: Now the children are members of the SMSF they are privy to the type and value of their parent’s assets. Some parents do not want their children to know their financial worth. So if the family members are not open about their finances, the pooling of superannuation can be problematic.
Relationship breakdown: If one of the children, who is a member of the superannuation fund, goes through a divorce or a breakdown in a de facto relationship then the Court may order a portion of that member’s superannuation to be paid to the spouse/defacto. This is likely to affect all members if the majority of the funds are invested in say one investment property or commercial property used in the family business. As a result of this relationship breakdown, this asset may need to be sold.
Deed amendment: Even though the legislation permits up to 6 members the superannuation deed may not. Accordingly, the deed of the SMSF may need to be amended.
The above represent a sample of some of the advantages and disadvantages of adding family members to an existing SMSF.
Should you require any further information regarding superannuation please feel free to contact Peter Quinn by submitting an enquiry or calling us on +61 2 9580 9166 to book an obligation free appointment.
The information in this document does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it. It is important that your personal circumstances are taken into account before making any financial decision and it is recommended that you seek assistance from your financial adviser.