The Government has legislated increasing the number of members in an SMSF from four to six.
There are benefits to expanding out the membership of an SMSF. For a start, it means there is a bigger pool of assets to invest. This can mean;
- cost savings (economies of scale for fixed fees such as administration);
- investment opportunities that require scale (e.g. accessing wholesale managed funds, buying large assets like property etc.);
- the ability to diversify more; and
- increased ability to take steps like set up an LRBA (because the risks of not being able to cover borrowing costs are lower if there are more members making contributions).
It also means there is a bigger pool of people to run the fund;
- work can be shared;
- potentially more expertise is available within the trustee group; and
- some of the members moving overseas from time to time might not require any change in the trustee structure when it comes to ensuring central management and control remains in Australia. This can be particularly beneficial where those moving overseas don’t actually want to step down as trustees as they wish to remain actively engaged in their fund.
Often parents talk about sharing an SMSF with their children as being a way of passing on their own learnings about investing and engaging with superannuation laws.
Some families – particularly as the parent’s age – manage at least some of their wealth together as part of preparing for an inevitable intergenerational transfer. All belonging to the same SMSF just makes that a little simpler.
The ability to have 6 rather than 4 members may make the difference between being able to have all children in the SMSF versus just some.
Of course there are the usual downsides that are always relevant when anyone new joins an SMSF:
- Will it change the power dynamic in the fund? SMSFs are trusts and so it goes without saying that all trustees (or directors of the corporate trustee) must act in the best interests of all members. In theory, then, it doesn’t matter whether the people who have most of the money also have the majority of “votes” when it comes to decision making about the fund. But obviously that is only ever put to the test when something goes so badly awry that courts are involved. More often, any disconnect between the preferences of the people who feel most invested in the fund (their balances are the largest) and the decisions made by the trustee just results in resentment.
- Simply having a larger number of people involved probably elevates the importance of solutions for those times when relationships sour. For example, in a fund that only has two members who are a couple, it’s really only necessary to be able to deal with the breakdown of their relationship. A larger fund should probably mean more emphasis is placed on circuit breakers like dispute resolution processes and even perhaps an exit plan. At what point will the arrangement have outlived its useful life and either some of the members will exit or the fund will be wound up? To what extent do these need to be agreed and committed to up front? These are not usually major considerations for two member SMSFs.
- If different members have very different risk profiles, cash flow and retirement timeframes, will they want different investment strategies? If so, will that additional complexity actually undermine the cost savings associated with having more members in one fund?
There are also some specific for SMSFs with more than four members:
- The ATO isn’t quite ready yet! This legislation appeared to be going nowhere for a really long time and then was passed just before the end of the financial year. So right now, a lot of online forms won’t allow 5 or 6 members.
- The fund will likely need a corporate trustee.
- More people will need to sign documents and that just becomes administratively challenging. It’s good practice to have all directors sign some documents – and that means 6 people.
For further information, please discuss with your Client Relationship Manager.