SMSFs that take advantage of the budget measure to increase the number of members allowed in a fund must think through issues such as increased administrative complexity, behavioural factors when it comes to investing, risk profiles, additional trustee penalties and increased risk of trustee disputes.
The government will amend the definition of SMSFs in the Superannuation Industry (Supervision) Act to increase the maximum number of members in new and existing funds from four to six, effective 1 July 2019.
This change is also proposed to apply to small Australian Prudential Regulation Authority funds from the same date.
In a SuperConcepts budget wrap-up video, technical services and education general manager Peter Burgess explained the change will allow for greater flexibility, particularly for large families and small business operators with multiple owners who wish to pool their superannuation.
“As the vast majority of super funds, around 90 per cent according to the ATO, have one or two members, it’s difficult to see this change having a significant impact on the sector,” Burgess said.
“It’s not surprising, therefore, this measure is estimated to have no revenue impact over the forward estimates.
“But funds choosing to take advantage of this change may face an increase in administrative complexity.”
He underscored the need to make investment decisions for a larger pool of members, which may lead to a more conventional investment mix than what would otherwise be the case.
“Recent research by SuperConcepts and the University of Adelaide shows that as the number of fund members increase, investments tend to be less risky and the group think leads to more familiar assets such as cash and domestic equities,” he revealed.
“So funds wishing to expand their membership will need to take care to properly identify and address these behavioural factors.”
In addition, he said with decision-making becoming less centralised there is the increased likelihood of undesirable outcomes.
“Take for example the scenario of children outvoting their parents on estate planning and other fund matters,” he said.
Colonial First State (CFS) FirstTech also said it believes the SMSF membership limit increasing to six will result in only minor uptake, however, where new or existing funds do take advantage of the new rules careful consideration will need to be given to a range of issues.
“These will include the need for multiple investment strategies to cater for members with different risk profiles and the need for a corporate trustee to avoid the risk of additional trustee penalties and to address the increased risk of changes in fund membership,” CFS FirstTech said.
“Larger SMSF membership may also result in increased risk of trustee dispute.
“Therefore, members may need to carefully consider the fund’s voting rules in the trust deed and confirm whether proportional voting rules should apply and whether some important decisions, such as the payment of death benefits, should require a unanimous decision.”
