Strategy, Superannuation

SMSFs including family members has pitfalls

SMSFs adult family members

The inclusion of adult family members in SMSFs should be properly assessed as this strategy can create additional elements of risk for all members.

The inclusion of adult family members in an SMSF is a complicated strategy requiring careful consideration and may not ultimately be in the best interest of each person involved, a mid-tier accounting firm director has warned.

According to HLB Mann Judd Sydney superannuation director Andrew Yee, the strategy might be considered in a positive light because, on face value, the children involved could benefit from their parents’ investment strategies.

However, because the parents and their children will be in different stages of the retirement savings lifecycle problems with adult family members in the SMSF could cause issues.

“Parents and their children are at different stages in life and therefore have different investment horizons and different requirements from superannuation,” Yee said.

“For instance, parents could be retired or planning for retirement, whereas their children may be just entering the workforce or even still studying; therefore their investment risk profiles are likely to be very different,” he added.

“They will need separate investment strategies in the fund and this would complicate the administration and investment strategy of the fund.”

Following on from this situation, Yee pointed out the tax treatment of the SMSF could end up being complex due to having some fund members in accumulation phase with others in pension phase.

“In this situation, the fund’s income would be part tax-free, due to the members in the pension phase, and part taxable due to those in the accumulation phase,” he said.

“Not only will this complicate the administration of the fund, but the older members of the SMSF will lose the tax benefits of refundable imputation credits, as these credits would be applied to the tax payable of the younger members.”

Yee identified the children’s relationship with their partners as adding an extra variable component to the SMSF that could ultimately put the fund’s assets at greater risk.

“Statistics show that young people have a higher risk of relationship breakdown and divorce. If this happens when they are also a member of the SMSF, then the assets of the SMSF will be exposed to the family court,” he said.

“This could be disastrous for older members who may be approaching, or already in, retirement,” Yee concluded.

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