A relative numbers game

queue of people

The proposed change in the legislation dictating an increase in the maximum number of members an SMSF can house brought the issue of SMSF size front of mind again. Tim Miller explains there is no hard and fast rule here and fund size considerations need to be made case by case.

Despite the recent legislative rejection of the six-member SMSF, the proposal raised many issues worthy of discussion if contemplating adding more members to an SMSF. With the exception that no member may be an employee of another member unless they are relatives, there are no other restrictions on who can be a member of an SMSF. But it doesn’t mean there shouldn’t be.

This article identifies a number of the issues to be considered when contemplating adding members to an SMSF. Of course, there is no right or wrong answer, but what is in the best interest of clients should determine the solution. Each point has its positive and negative elements and it is a matter of weighing all of these up. Some issues are superficial to the extent they don’t impact on the operational side of an SMSF, whereas others can have a far greater effect on the compliance status of the fund.

It’s all about the costs

Costs have long been raised as a matter for debate within and external to the SMSF sector. What is not a matter for debate is the costs to operate an SMSF vary widely from the exceptionally cheap to the outrageously expensive. Given the costs are generally treated as a proportional expense of a fund, then it makes sense to contemplate more members to keep the ‘per member’ cost of operations down.

This approach works nicely in the event that a fund operates in a fairly vanilla environment. Where costs become an issue, putting aside the unnecessarily high fees some might charge, is where adding members adds complexities, particularly around asset segregation. There have been many instances where a fund has added a new member only to then create completely different investment strategies, bank accounts and investment holding accounts, which ultimately results in higher administration fees.

So while costs should never be the determining factor in whether a new member should be added, they are certainly a comparative point.

Trusteeship – cost versus time versus power

The industry has long considered corporate trustees are more effective than individual trustees and the cost of having a corporate trustee far outweighs the issues associated with not having one. Adding members is one of these issues.

Administrative simplicity is something many funds seek and adding members to a fund with individual trustees is anything but simple, particularly for a fund with varied investments. These issues can, of course, be overcome by establishing a fund with a corporate trustee in the first instance, but given many funds don’t do that, they need to be made aware of the time factor associated with such a change.

To think all family units are happy and in agreeance with each other on all matters is at best naive, but ultimately underestimates the power money has over some people.

Tim Miller

Certainly, from an intergenerational point of view, having a corporate trustee makes the transitioning of members into and out of an SMSF far more streamlined.

While for many, trusteeship, or more appropriately trustee structure, is a secondary issue, trustee powers is undoubtably a primary issue and control is the poster child of many SMSF promoters.

Who really controls the fund?

There is no doubting control is a strong selling point for SMSFs, however, it is only a good thing until the moment you lose it.

The definition of an Australian superannuation fund requires that central management and control remains in Australia. In very simple terms, control in this instance requires a fund to have more trustees in Australia than overseas. Therefore, for a fund with members who have employment or other factors that result in long-term absences from the country, adding Australian-based members can provide a sustainable alternative to appointing enduring powers of attorney that act on existing members’ behalf or taking other actions to satisfy compliance requirements.

It should be noted that as long as at least 50 per cent of trusteeship is in Australia and all trustees are equal in decision-making, then there is no issue with the central management and control being retained in Australia. To this point, adding members provides existing members with retained control, whereas maintaining existing fund membership and appointing enduring powers of attorney may result in the member losing control.

Where control becomes questionable is where life events may impact on the balance of power. To think all family units are happy and in agreeance with each other on all matters is at best naive, but ultimately underestimates the power money has over some people.

The best-intentioned family is just as susceptible to power plays as the worst-intentioned one. In both instances, meticulous planning, advice and documentation are the best way to ensure members get what they want when they aren’t in a position to provide it themselves, for example, through disability and death.

Adding younger family members to an SMSF can be of great assistance to ageing members, particularly as parents’ needs change in relation to aged-care facilities and the like, but there is the associated risk that those who hold the cheque book control the fund. It is a sad state of affairs when we have to contemplate whether our children or siblings are likely to take advantage of us, but it is also a reality. Taking it a step further, it may not be direct family members who create issues but rather extended family members, such as spouses and children of spouses from previous relationships. While family disputes can occur and unscrupulous parties can be appointed as legal personal representatives, once a member loses capacity or dies, every consideration needs to be given when adding new members to determine what controls, if any, need to be addressed to protect a member’s benefit.

Taxation and investments

All these matters are simply food for thought when contemplating the structure of the fund. That’s not to suggest it is not worthwhile adding members to an SMSF as there are certainly intentional benefits in doing so.

Greater membership provides greater purchasing power and in some instances can be the difference between the need to contemplate the more restrictive borrowing provisions or not. Further, the use of an SMSF to hold family business assets, property being the most significant, can provide asset protection and also taxation benefits. Holding the family business property inside super ensures that not only are the family members benefiting from contributions, but also from rental income and concessional capital gains tax (CGT) treatment on the sale of the asset.

It is a sad state of affairs when we have to contemplate whether our children or siblings are likely to take advantage of us, but it is also a reality.

Tim Miller

Of course, there is also the thought that increasing membership can futureproof the fund against legislative changes or at least minimise the impact of some changes. The ongoing debate about the removal of franking credit refunds is one such area. The obvious impact is that more members with accumulation entitlements means the fund has more assessable income and as such there is great value in franking credits. Along similar lines, any changes to CGT discount rules appear, on face value, to exclude assets held within a trust, so the benefits of investment via an SMSF still remain.

While some of these issues are purely speculative, there are investment issues that have been in place for 20 years now and they have a greater impact on the compliance status of a fund and are directly linked to fund membership.

Related-party rules

The evolution of excluded funds to SMSFs in 1999 tightened the rules on trusteeship and membership. Also in 1999 we were introduced to Part 8 associates as defined by the Superannuation Industry (Supervision) Act 1993, expanding the in-house asset rules beyond standard employer-sponsors to include related parties. At the very point that related parties, as defined within Part 8 associates, included other members and trustees of the fund, we should have determined once and for all that SMSFs should be for family members only and if business associates wanted an SMSF then they should have set up separate funds with a view to invest jointly. Interestingly, the earliest drafting of the definition of an SMSF did indicate family only before finally setting on the current definition.

Hindsight is a wonderful thing, but 20 years later many of these ‘associate’-based SMSFs are dealing with income streams and estate planning issues and what once seemed a logical process, setting up an SMSF with a business partner, is now a web incorporating, among other things, disenfranchised business partners, awkward membership arrangements, illiquid assets and likely problems due to asset segregation and ill-fitting insurance strategies.

Even if we put all the above issues aside, one of the great concerns, as highlighted by the annual compliance reports issued by the ATO, is the number of breaches by SMSFs that are directly linked to related-party transactions. Certainly many of these are a direct result of inappropriate activity by family members within an SMSF. But how many of these are inadvertent due to a lack of understanding of the Part 8 associate rules? By adding more members to a fund, the scope of the Part 8 associates measure is broadened.

Many of you would have been asked the question: “So-and-so’s SMSF invests in his/her private company, why can’t mine?” While we give consideration to the sole purpose test when making investment decisions, it’s imperative to understand the structure of what we are investing in. One of the first things to consider is whether it is an investment in a related party, and the first place we look for related parties is within the fund. Of course, family SMSFs trying to invest in family businesses are going to be captured under the same restrictions, but identifying that it is a related entity is far easier and can be addressed immediately, even with the exclusions of former spouses and cousins. Determining what is a related entity beyond direct family relations adds great depth of complexity.


When considering whether an SMSF is in the best interest of a client, it is important to determine what fund membership is in their best interest too. By extension, it is also important to determine what trustee structure to use, although the evidence is fairly compelling on this matter. For example, it’s of little use to suggest establishing two single-member funds to business associates, simply to avoid being considered related, if they then appoint each other as individual trustees or they appoint the same corporate trustee with them as directors.

Super reform is a moving beast and while some reform, such as increasing maximum fund membership from four to six, is unlikely to proceed in the near future, it doesn’t mean we should not be considering the consequences of decisions such as adding a new member to a fund. It may be all members, related or not, are happy with the status quo and adding or removing members will have an adverse affect, but it may also be the opposite. The points made above are only a handful of considerations when contemplating adding members and each fund’s set of circumstances will be the final determinant in what is important. There is no right or wrong, there is only right or wrong for you.

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