The increase in members allowed in a SMSF from 4 to 6 was originally announced in the 2019 budget and has now finally been legislated with a commencement date of 1 July 2021. While this change provides a number of opportunities there is also a range of risks that need to be considered.
Opportunities
• Larger families may now be able to include all children within one SMSF which will be more cost effective than operating two SMSF’s.
• The addition of new members into a SMSF may provide cash flow benefits through the rollover of existing super balances and ongoing contributions for the new members. This may assist with the purchase of high value assets (i.e. property) or the ongoing loan repayments for a Limited Recourse Borrowing Arrangement.
• Members who have already reached a Total Super Balance of $1.7 million, may utilise children to continue to make contributions and move wealth into the superannuation environment.
• Members who have mix of retirement and accumulation balances may consider transferring the accumulation balance to their children through a recontribution strategy to avoid having to sell SMSF investments on their death. This may provide the ability to transition a business or family asset to the next generation.
• Business partners could utilise a SMSF for the purchase of the business premises. Utilising 6 business partners (or spouses) could provide the ability to purchase a property without borrowing or purchase a more expensive property.
Risks
• All members (except for some exclusions) must be a trustee or director of the corporate trustee. Standard trust deeds and company constitutions usually give equal voting rights to each trustee/director. This means irrespective of member balances, equal voting rights may result in parents being out voted by their children.
• Adding more members to a SMSF will naturally increase the possibility of disputes and conflicts between its members. Whether this occurs as a result of a family law dispute, dispute over the payment of death benefits or a business partner dispute, the costs to unwind a SMSF structure can be significant.
• Insurance benefits within non SMSF accounts may be lost if a full transfer of a members balance into the SMSF occurs. Further insurance cover may be more costly within a SMSF.
• Investment strategies and risk profile across age groups may vary therefore need to consider how these are satisfied across members.
The increase in allowable members for a SMSF will not be suitable for everyone. While it provides further opportunities, it is important to always consider and understand the risks and exit strategy should there be a relationship breakdown/conflict in decision making.
If you are interested in knowing more about how these proposed superannuation measures will impact you or your superannuation fund, please reach out to your adviser.