Exiting hinders six-member SMSFs

SMSF six members

The process of exiting individuals from an SMSF is something trustees should consider before deciding to add members to a fund.

A panel of specialist practitioners has warned the ability and process to exit members from an SMSF may negate any benefits trustees feel they will receive from adding family members to a fund now that a maximum of six members are allowed to be serviced by this type of retirement savings vehicle.

Cooper Partners head of SMSF and succession Jemma Sanderson noted it is relatively easy to admit a new member into a fund, making it seem like an attractive option for parents looking to make the receipt of employer contributions easier for their children when they are entering the workforce.

“That’s all great, but then at some point [the child] might want to start doing their own thing and getting them out of [the fund] can be a real pain,” Sanderson told delegates at The Tax Institute Superannuation Intensive event held online recently.

“I just don’t like the [possibility of having to manage] disputes later trying to exit people out of [the SMSF] … everything works fine until it doesn’t.”

Fellow panellist KPMG Australia partner and enterprise head of SMSFs and estate planning Julie Dolan noted the pain of exiting a member can be alleviated, but agreed the potential problems in getting members out of an SMSF compromise the decision to establish a six-member fund.

“I’ve seen some deeds that [incorporate] conditional membership where you can get [members] out of the fund more easily, but [I’ve experienced] some really awful situations [where people] are trying to get the kids out when the family has just fallen apart,” Dolan said.

Sanderson said the probability of divorce needs to be considered before children are admitted into an SMSF and in the event of a marital split, having fewer members in the fund is advantageous.

“[Having to deal with divorce in a husband and wife fund] is less of a risk than [if a six-member fund is involved]. There are fewer scenarios that might arise that will be horrible and annoying because getting people out [of an SMSF] is a pain,” she noted.

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