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The pros and cons of six-member SMSFs

six-member SMSFs

Six-member SMSFs have moved closer to becoming a reality but despite the advantages they offer there are also some drawbacks to consider.

The prospect of six-member SMSFs moved a step closer when the Treasury Laws Amendment (Self-Managed Superannuation Funds) Bill 2020 was recently introduced into parliament. If the bill is finalised as law in November, the increase to the maximum allowable number of members for an SMSF could commence as early as 1 January 2021.

The bill proposes to amend a variety of acts, including the Superannuation Industry (Supervision) (SIS) Act 1993, to increase the maximum number of allowable members in an SMSF from four to six.

Naturally, there are a range of advantages and disadvantages that need to be carefully considered before adding additional members to an SMSF.

Accounts and statements

The bill amends the current requirement for signing off an SMSF’s accounts and statements each financial year. The amendment provides that when there are more than two directors of a corporate trustee or individual trustees, the accounts and statements must be signed off by at least half of the directors of a corporate trustee or, if applicable, at least half the number of individual trustees. For example, if there were six members in an SMSF, the annual financial statements should be signed off by at least three members (in their trustee/director capacity).

For this reason, the quality of the constitution for a corporate trustee and the quality of the SMSF deed become far more important when an SMSF can have up to six members. For example, some SMSF deeds give the power to appoint or remove trustees either to the majority of trustees or the majority of members by headcount.

We strongly recommend a corporate trustee be used due to the many advantages a special-purpose company provides. Thus, for simplicity, we will refer to directors of an SMSF trustee company from now on rather than also referring to individual trustees as well.

Accordingly, careful consideration should be given to the quality of the documentation used. In particular, clients should check to ensure all decision-making powers and other rules are designed appropriately to reflect additional people being admitted to an SMSF. The trustee-member rules in section 17A of the SIS Act generally require that all members are also directors of the corporate trustee and vice versa. Therefore, typically admitting new members will require these members to be appointed as directors of the trustee company first, subject to the new members being represented at the trustee level by a parent/guardian when they are under 18 or an attorney under an enduring power of attorney. This means the addition of new members may complicate decision-making and paperwork at the trustee level.

For example, many document suppliers provide documents that allow for decision-making based on simple headcount, when a client may prefer decision-making reflective of the members’ account balances.

Alternatively, parents may consider representing their children who are over 18 at the trustee level by making sure they are appointed as an attorney under the children’s enduring powers of attorney. This may assist in ensuring the parents maintain greater control of the fund and alleviates the children from administrative and other responsibilities they may not be interested in.

Advantages of larger funds

There may be certain advantages with having additional members in an SMSF as this may provide for greater flexibility in terms of investments, that is, by creating a greater investment pool for the fund.

Larger families may also welcome the increased limit as six members would allow mum, dad and up to four children to be involved in the family’s SMSF. In contrast, the current limit only allows up to two children in addition to mum and dad.

With added members, there is also the potential to accumulate more in superannuation overall as each member also obtains their own contribution limits.

While there are some advantages in having a larger fund, naturally, on the flip side, there are some disadvantages.

Disadvantages of larger SMSFs

SMSFs can work very well when all members agree and get along. However, the SMSF structure is not always well suited to managing conflict over time and admitting additional members to a fund gives rise to a significant risk of there being more disputes and conflicts over time.

Family law risk is also an important consideration. With the divorce rate in Australia well above 40 per cent, many families may experience separation or divorce and the retirement savings in the SMSF are more likely to become entangled in messy legal disputes in the context of new members being admitted.

Additionally, we have witnessed an increasing number of death benefit disputes in recent years in relation to who should be paid the deceased member’s death benefit. Unless a death benefit is carefully managed, this could easily become problematic as families and relationships become strained and further disputes arise.

Naturally, succession planning and the future control of an SMSF become increasingly important given more people are involved with the fund’s management. Making sure a person’s wishes are properly documented becomes critical for those who do not have confidence in trusting the remaining directors who control the fund.

Other considerations

Most states and territories, including New South Wales, Victoria, the Australian Capital Territory, Western Australia and Queensland, only allow for up to four individual trustees. Accordingly, a corporate trustee is required for funds that seek to have more than four members. As also discussed above, a corporate trustee for an SMSF is strongly recommended.

Further, some SMSF deeds are hardwired and only allow a maximum of four members and will need varying before more than four members can be allowed.

Conclusion

On balance, the ability to have up to six members enhances flexibility. However, in the absence of appropriate succession planning and having the right documentation in place, it could result in an increased risk of major problems occurring, for example, due to dysfunctional decision-making, disputes and family law risk. Accordingly, expert advice should be sought to ensure the SMSF trustees/directors and members are informed and aware of the advantages and disadvantages before proceeding.

Daniel Butler is director and William Fettes is senior associate at DBA Lawyers.

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