Expanding SMSF could lead to family fallout

Be careful what you wish for if expanding Self Managed Superannuation Funds from four to six members.

Changes are afoot to increase the maximum number of self-managed super fund members from four to six.

The Treasury Laws Amendment (Self Managed Superannuation Funds) Bill 2020 was introduced into parliament in September and successfully navigated its way through the Senate economics legislation committee this week with recommendations it be passed.

So we will see the maximum increase from four to six from April 1 or July 1 next year. (Given the limited number of parliamentary sitting days remaining this year, it is uncertain whether there is enough time for the bill to be passed in both houses.) Either way, it means this long-planned expansion of SMSF funds will happen and investors can start making plans. 

SMSF Association chief executive John Maroney is pleased the change is one step closer.

“We’ve always said increasing the maximum number of SMSF members from four to six would provide additional flexibility and choice in the superannuation system for those in a position to use it,” he says.

“We also believe this measure may lead to lower superannuation fees and could improve the ability to pool balances and invest in a greater choice of assets.” 

In other words, more SMSF members equals more funds available and more purchasing power.

Sofcorp Wealth certified financial planner Tracey Sofra agrees. “This change might appeal to those families in business together who want to pool their funds to invest in business property which they can use in their business,” Sofra says.

“It is also a way that small businesses can use their super money to purchase the property from which they operate through the SMSF — they may now potentially have the funds to purchase this outright without having to establish a bare trust to do the non-recourse borrowing.” 

Given that borrowing interest rates for an SMSF is double the going rate of an ordinary investment property loan, pooling money and collectively buying a property asset outright in an SMSF does not seem like a bad idea in the right circumstances.

But having more members in an SMSF is not just about getting more dollars in. It is also about allowing more equality within the family unit. 

“Lifting the number of SMSF members from four members to six means that many families won’t have to make that tough decision as to who to leave out of the fund any longer,” BDO national leader for superannuation Paul Rafton says.

“We are often asked if adult children can join an SMSF to assist elderly parents to manage the SMSF and its investments, and if it is appropriate to pool financial resources into one SMSF.”

The downside of having more members in the SMSF also needs to be considered before jumping in and making the change.

“Different members may be at different life stages and have different risk appetites,” Rafton says. “Most commonly, Mum and Dad will be more conservative in their investment decisions, and younger members are likely to be less risk averse and able to withstand the potential volatility in earnings from more risky investments. This age and life-stage imbalance can cause friction around investment decision making in the SMSF.”

 There are also potential issues if there is a falling out or relationship breakdown within the family unit of members who make up the SMSF.

The aggrieved parties may make it difficult for decisions to be passed on everyday fund actions such as management, investments and benefit payments.

Alternatively, if a member wishes to exit the SMSF, there could be trouble if there is not sufficient liquidity or separable assets to roll over the departing member’s balance out of the fund. 

Another issue with expanding SMSF numbers is one of administration. All SMSF trustees are required to sign on most SMSF forms and documents, although this requirement is being relaxed with the incoming bill.

After it is passed, where a SMSF has more than four members, only 50 per cent of trustees will be required to sign the annual accounts and statements. But for other SMSF forms such as bank account setups or investment applications, all SMSF trustees generally will need to sign.

This may lead to significant delays if paperwork needs to be posted from one trustee to another until all signatures are gathered. 

James Gerrard is principal and director of Sydney financial planning financialadvisor.com.au