The 6 member SMSF rule - Should it be used?

Following the safe passage of the Treasury Laws Amendment (Self Managed Superannuation Funds) Bill 2020, SMSFs and small APRA funds can have up to six members from 1 July 2021. 

Before you go adding additional members into your SMSFs and small APRA funds there are a numbers of factors to consider.

There are definitely benefits to expanding out the membership of an SMSF.

For a start, it means there is a bigger pool of assets to invest. That 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. The fact that everyone is in the same SMSF together means it’s no longer theory and advice, it’s reality.

And finally, some families – particularly as the parents 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.

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.
• 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.
• 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?

But there are also some that are quite 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 all of a sudden it was passed just before the end of the financial year. You will find that a lot of online forms won’t allow 5 or 6 members. While there will always be manual workarounds, it might be worthwhile waiting to make sure that rollovers and contributions aren’t held up unnecessarily,
• The fund will likely need a corporate trustee. While we think corporate trustees are a good idea anyway for a host of reasons, they are actually the only solution in many six member funds as most state laws governing trusts only allow a maximum of four individual trustees.
• 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. At the very least most documents (eg financial statements) will need to be signed by at least half of the directors which means 3 people for a 5 or 6 member fund.

Please don't hesitate to contact our office should you have any queries or concerns.

The Money Edge | Bundaberg