Flexibility for SMSF membership coming soon

The maximum number of allowable members for SMSFs could soon increase from 4 to 6 if a recently reintroduced Bill passes Parliament. The Bill was previously a part of the 2018-19 Budget measures and was aimed at providing more flexibility to many SMSFs with aging members and larger families. By allowing more members, the government envisions that SMSFs will become a part of intergenerational solutions for managing long-term investments. It would also potentially allow members to plan around contribution caps and transfer balance limits.

The government has recently reintroduced a Bill to Parliament that proposes to increase the maximum number of allowable members from 4 to 6. The contents of the Bill were previously contained in the 2018-19 Budget and introduced into Parliament before being unceremoniously dropped due to lack to support from the Opposition at that time.

The reintroduced Bill proposes to amend the relevant sections of the superannuation legislation to require an SMSF to have fewer than 7 members (currently it is fewer than 5) to satisfy the definition of an SMSF. This change, according to the government will provide flexibility to many SMSFs with aging members and those with larger families.

By allowing more members, it is envisaged that families with up to four children can be a part of a single-family super fund to implement intergenerational solutions for managing long-term investments. It would also allow better planning around contribution caps and transfer balance account limits.

For example, allowing 6 members in an SMSF could provide opportunities to improve cash flow by using the contributions of younger members to make pension payments to members in retirement phase, without needing to sell a long-term investment, whether that be a property or a stake in a business. Currently, the only option for families with more than 4 members is to create 2 SMSFs which increases compliance costs and complexity.

Even though the proposal to allow more members in an SMSF is seen to be largely advantageous, anyone contemplating utilising this once it becomes law should be careful. One obvious drawback is that each member of an SMSF must also be a trustee of the fund, hence adding extra members will have implications for the fund’s trustee arrangements.

As an example, if a current 2 member SMSF (a couple of retirement age) add 3 of their adult children to the fund, it can add complexity to the fund’s management and investment strategy as well as impact on who controls the fund in the event of a dispute. This is especially relevant in the event of the death of a member, as the surviving trustees have considerable discretion as to the payment of the deceased’s super benefits (subject to any binding death benefit nomination).

There have been many cases in recent years involving trustees of SMSFs after the death of the member mostly involving whether the deceased’s super benefits ought to be paid to certain parties. Some of these cases have proceeded all the way to the Supreme Courts of their respective states, costing considerable time and money. Therefore, any decision to add extra members if this proposal becomes law should be carefully considered and not taken lightly.

Planning for the future?

If you would like to take advantage of this potential change and add members to your SMSF, we can help you work out the advantages and navigate the pitfalls. If you’re using your SMSF as a part of your estate planning, we can also put strategies in place to help you achieve desired aims.