by Alex Polorotoff
It seems likely that the Bill currently before Parliament, increasing the maximum number of members in an SMSF to six, will receive royal ascent. It is interesting to see how much discussion this is currently generating, considering over 90% of SMSFs only have one or two members.
There is a lot to consider though, when adding members to an SMSF and it may not always be a good idea. In this article, we review the practical considerations of multiple member SMSFs, their advantages, disadvantages and why you need to be aware of them.
WHAT ARE THE PRACTICALITIES THAT NEED TO BE CONSIDERED?
If passed, the Bill will apply from the start of the next quarter. This means it could apply as early as 1 April or 1 July.
In most cases, the SMSF will be required to have a corporate trustee as the Trustee Acts in NSW, QLD, VIC, WA and ACT currently limit the number of individual trustees an SMSF can have to four. All trustees/directors are also required to be members of the SMSF. Therefore, before adding more members, the trust deed must be reviewed as current deeds may limit the number of members to four.
The decision making process will also need to be reviewed as the number of members increase. Having tailored documentation, rather than off the shelf deeds or constitutions, may be an appropriate solution, allowing voting rights to be tailored to what best suits the SMSF. Voting could be based on the majority of directors, member balances or other special rules. Having more directors may make it difficult to reach consensus however, it may also stop one member taking control of all decisions. One of the main reasons in having an SMSF though, has been the ability to control decisions, so having more members may not necessarily be suitable.
Trustees cannot remove members without their consent nor can members wanting to rollover their benefits to another fund, leave without trustee involvement. This may make it difficult to remove problem members or, members wishing to rollover their benefits to another fund, being blocked from doing so, perhaps due to liquidity issues.
Death benefits still have to be paid according to the usual rules, so having extra members doesn’t necessarily mean the death benefit can simply remain in the SMSF. However, if it can be paid as a pension and that person isn’t currently a member, they can join the fund to receive the death benefit as a pension. Death benefit planning is also more important as the number of members increase, to ensure it is dealt with in accordance with the deceased’s wishes and not necessarily how the remaining members would like.
Finally, investment strategies need to consider the needs of all members, even if they are in different investment cycles, and not just those members with higher balances. This might typically arise where a husband and wife are approaching retirement, or have already retired, but their adult children, who are also members, are in the ‘accumulation’ phase.
WHAT ARE THE ADVANTAGES OF HAVING MORE MEMBERS?
There are some clear advantages to having more members in an SMSF. It provides more money to the SMSF, allowing for the purchase of larger or higher value assets, such as business real property or large parcels of land. It also provides the opportunity for greater diversification of investments.
If a member is moving overseas, having more members can assist in dealing with the central management and control, along with meeting the active member test, to ensure the SMSF remains a complying Australian resident fund and continues to receive concessional tax treatment.
There are also potential cash flow benefits. Younger members, who are making contributions to the SMSF, could help with maintaining LRBAs, retaining large illiquid assets and financing pension accounts.
WHY YOU MIGHT NOT PROCEED WITH A MULTIPLE MEMBER SMSF
A number of issues can also arise with increased members in an SMSF:
If you’re providing advice to a client who is considering moving from a single member SMSF to a multiple member one, you still have the duty to accurately inform them of what they need to consider. Whilst this Bill is yet to pass Parliament, we need to understand the potential impact of SMSFs having more members and ensure correct documentation, such as deeds and constitutions, are in place to help it run as smoothly as possible. It’s also important to ensure the investment strategy remains compliant, as this is now a focus area for auditors who may be required to report any breaches to the ATO.
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