On the 1st of July 2021, the Government passed the Treasury Laws Amendment to allow SMSFs and small APRA funds to have six members (an increase from the previous limit of four). To the layperson, this may seem like a non-event, however, for self-managed superannuation funds owners and trustees, the passing of the six-member bill comes with both advantages and disadvantages, as well as giving rise to some opportunities.
We highlight the advantages and disadvantages of using a six-member fund.
The key distinction to make now that self-managed super funds can have six members is that they aren't required to have six members. In fact, the Australian Taxation Office (ATO) (who regulates SMSFs) note that at the time the six-member bill was passed, almost 70% of self-managed super funds were two-member funds.
The SMSF Association of Australia expects large families to benefit from the increase in allowable member numbers.
As we mentioned earlier, larger families can benefit from having up to six members, notably as it provides the opportunity for additional choice and flexibility in the superannuation system for those with adult children. As adult children embed themselves in the workforce and become married, the six-member option allows them to pool their superannuation resources with their spouses and parents.
Particularly in the example of large families, the option to have more than four members has the potential to reduce operating costs. Previously, families may have needed multiple funds operating to achieve the same outcome as being able to all participate as members of the one fund. This means that the need for multiple administration and operating fees is removed.
To receive tax concessions on your self-managed superannuation fund, it must qualify as an Australian superannuation fund at all times throughout the financial year. If any members travel overseas for a prolonged period, it can cause issues with satisfying the residency rules and meeting the conditions of central management and control. More members increase the chances of meeting the active member test.
Good to know: a relaxation to the residency rules and central management and control test were proposed in the May 2021 budget. The legislation is yet to reach royal assent, however, once passed, the active member test will be removed and members will be able to temporarily reside abroad for a further three years than what is currently allowable.
With more member balances pooled together comes a greater capital balance to invest. Greater investment power may also open the opportunity to adopt investment strategies that were not previously considered, and introduce better negotiating power. Also, certain taxation strategies [link to SMSF tax article] can be more efficiently implemented with larger balances.
In the sad event that a member dies, six-member SMSFs provide a more streamlined approach to making benefit payments (such as reversionary pensions) which also assists with intergenerational wealth transfers. This is particularly appealing for a family SMSF, where a family business is being run.
Given that all members of six-member funds (and those with corporate trustees) need to be SMSF trustees, decision-making, particularly when it comes to investment decisions, can be indecisive in a larger fund.
Naturally, more members mean more reporting and further administration, particularly if you need to switch to a corporate trustee.
Suppose your SMSF trustee structure needs to be moved from individual trustees to a corporate trustee as a result of having greater than four members. In that case, this can introduce further set up costs, administration fees, title transfer fees, company registration fees and ASIC fees.
Younger members of an SMSF will naturally have a different investment horizon than older members who are closer to their preservation and retirement age. This may cause some friction or complexity in determining an appropriate investment strategy.
Assess the implications of switching between individual trustees and a corporate trustee structure.
Succession planning and estate planning documents must be updated when new members are introduced to a fund.
The SMSF Trust Deed must be updated to incorporate the introduction of more fund members.
The SMSF investment strategy also needs to be reviewed to facilitate the investment objectives of all members.
HALO Technologies offers investment solutions for every type of investor — we can assist in leveraging the greater investment power that comes with multi-member SMSFs.
All information contained in this publication is provided on a factual or general advice basis only and is not intended or be construed as an offer, solicitation, or a recommendation for any financial product unless expressly stated. All investments carry risks and past performance is no indicator of future performance. Before making an investment decision, you should consider your personal circumstances, objectives and needs and seek a professional investment advice. Opinions, estimates and projections constitute the current judgement of the author as at the date of this publication. Any comments, suggestions or views presented in this communication are not necessarily those of HALO Technologies, Macrovue or any of their related entities (‘we’, ‘our’, ‘us’), nor do they warrant a complete or accurate statement.
The opinions and recommendations in this publication are based on a reasonable assessment by the author who wrote the report using information provided by industry resources and generally available in the market. Employees and/or associates of HALO Technologies or any of the other related entities may hold one or more of the investments reviewed in this report. Any personal holdings by HALO Technologies or any of the other related entities employees and/or associates should not be seen as an endorsement or recommendation in any way.
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