Six-member fund pitfalls underscored

An industry law firm has warned of the potential downsides of having six members in an SMSF.

The federal government confirmed its proposal to increase the maximum permitted number of members in an SMSF from four to six in this year’s budget.

While this change will not come into effect until 1 July 2019, it is worthwhile examining how it will impact on funds in the 2020 financial year, Townsends Business and Corporate Lawyers solicitor Elizabeth Wang said.

“It goes without saying that the more members there are in a fund, the greater the challenge there is for all members to manage the fund in their best collective interests,” Wang said.

“An increase in the number of members may mean that the fund is more susceptible to the members abusing their position in the fund by improperly, and without authorisation, removing money from the fund’s bank account for recreational reasons.”

She also said six-member funds could result in members outvoting other members in the SMSF.

“This may arise in situations where the children may try to outvote the parents in order to achieve their interests at the expense of their parents’ interests,” she said.

“[Also] having different generations, in possibly different superannuation stages, may give rise to different priorities as to investment strategies.

“Different investment priorities can be easily accommodated by the fund having two or more investment strategies – one appropriate for early accumulation stage and a second strategy appropriate for retirement stage.

“The early accumulation-stage strategy could apply to the children’s super interest, while the retirement-stage strategy could be appropriate for the parents.”

She said some industry commentators have flagged that the cost of managing the investment portfolios of six members would be as high as having the extra members in their own SMSF, so no cost benefits may apply.

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