The federal government’s decision to increase the number of members allowed in SMSFs from four to six is a positive outcome for the SMSF sector. It will afford SMSFs more flexibility in how they are structured, especially for those families that want everyone under the same super roof.
Only a small number of funds will be attracted to the idea. More than 90 per cent of SMSFs either have a single member (23 per cent) or two members (70 per cent), according to ATO statistics. But for those family groups that want to have more than four members in their fund, this proposal will be very welcome.
However, before listing the benefits of an expanded SMSF, it’s important to clear up a common misconception that has been flagged around the issue of investment in an SMSF. Essentially, the argument says getting unanimity of opinion on investment, both strategically and tactically, in a six-member fund will be nigh on impossible. Quite clearly, millennials and even generations X and Y will have different investment goals to their baby-boomer parents, many of whom will be in retirement phase.
For those trustees who believe this could be a stumbling block to running a six-member fund, let me assure you – it’s not.
The fact of the matter is the different members of the fund can make their own investment choices inside the one fund provided they comply with the SMSF’s trust deed and overall investment strategy. Everyone in the fund can have the capital growth and income their investments earn specifically credited to their own account. It’s as simple as that.
"The federal government’s decision to increase the number of members allowed in SMSFs from four to six is a positive outcome for the SMSF sector."
What it means in practice is that a retired couple and their two married children can happily coexist in the same fund. For example, the retirees, with $1.4 million in the fund, want a conservative approach to investment: lots of cash for liquidity and capital security, blue-chip Australian shares for yield and some growth and unlisted commercial property to lock in yield to meet those pension payments.
Their two children, both in their mid-30s, married, with young children, obviously have a far different outlook. They only have about $100,000 each to tip into the fund and are looking to invest aggressively to build their nest eggs. Alternative asset classes such as overseas shares and the more speculative end of the Australian share market are attracting their interest, understanding they have at least 30 years to weather the peaks and troughs of the investment cycles.
Neither the parents nor children can force investment decisions on each other. The parents are shielded from any risky investment decisions their children make and, conversely, the asset growth the children want will not be diminished because of their parents’ more conservative approach.
Subject to the rules in the trust deed, it is even possible to have separate investment strategies in the same fund to reflect different interests of each fund member, with the only exception to this general rule being if everyone decides to pool all their investments together and generate a single average return that is the same for all members and credited to all accounts on a proportionate basis.
Having got that misunderstanding out of the way, there are real tangible benefits to having six members in a fund.
Returning to the investment theme, increasing the funds under management (FUM) allows greater opportunity for more investment choice. A bigger FUM could prove particularly beneficial for the younger members of the fund who may want to invest in non-liquid assets with a long investment time frame.
On the cost side, adding more members pushes it down because the costs of some administrative functions are fixed.
Franking credits earned by any member of the SMSF are available to offset the tax liability of other members of the SMSF, remembering it’s the fund, not the individual, that is the taxpayer. This is particularly significant given Labor’s proposal to disallow cash refunds for excess dividend imputation credits. This principle can even extend to franking credits earned on pensioner accounts offsetting contributions tax on accumulation member accounts.
The final benefit is less obvious, but just as critical. Survey after survey finds that getting young people interested in superannuation is difficult, to say the least. The number of multiple accounts many young people hold is testimony to that fact. So, any initiative that gets young people more engaged with their finances must be a positive, and expanding an SMSF to include children could be one way to achieve this worthy goal. No doubt, for many parents, the idea of enlisting their children in their SMSF will fail to enthuse. But for those who want to go down this path, there are real positives for doing so.