As we have come to expect, the federal Government has enacted further changes to self managed super funds. From 1 July 2021 self-managed super funds (SMSF) are able to have up to six members. Previously a maximum of four members were allowed. The majority of funds have either one or two members, usually established for the benefit of spouses.
The increase in members may suit larger families and can decrease the administrative costs of operating more than one SMSF. However, there are certain matters to consider if you are intending on expanding your SMSF.
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SMSF Structure
Members are required to be represented at the trustee level, either by individual trustees or a corporate trustee. For funds with more than one member:
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Each member must be an individual trustee; or
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Each member must be a director of the corporate trustee.
It is important to note that State and Territory Legislation governs the number of trustees that a trust can have. The Legislation should be checked prior to making any change if you currently have individual trustees. It is likely that a corporate trustee will be required and this is strongly recommended.
The company constitution may stipulate rules regarding meetings of directors and voting rights and these need to be carefully considered. It is possible for the voting rights of members to be based on their member balance as opposed to each director having one vote. This is critical when considering th emanagement of the super fund in the context of a death benefit to be paid to the estate of a member or a nominated dependent.
The increase in members can reduce efficiencies in decision making and the management of the fund if the members do not agree on investment or other matters for the fund.
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Dispute resolution
Steps can be put in place to reduce the difficulties with decision making and to assist in dispute resolution. This may include tailoring the deed or other documents, including:
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Providing members with exit rights that do not jeopardise investments;
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A co-ownership agreement to deal with assets that are difficult to divide;
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Modifying the constitution for the trustee company regarding decision-making, such as restricted issues, voting rights according to member balances or where a unanimous decision is required.
It is essential that advice be obtained to ensure that adding specific provisions to the trust deed does not cause the SMSF to cease being a regulated fund.
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Investment
How superannuation is invested can be key. Having additional members to the fund can provide additional investing power. The intergenerational transfer of assets can also be tax-effective.
It is important that all members agree on the long-term goal for the fund. Younger members may seek longer investments or have different interests. They may be more prepared to invest with a higher risk level. These differences can cause issues when investing.
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Paying Benefits
The control of the SMSF after one member dies and the release of their death benefits needs to be carefully considered. If the remaining trustees have control over the payment of death benefits then there is a risk that they could pay the benefits according to their own wishes.
Ensuring you have a valid death benefit nomination in place is even more important in a fund with multiple members to ensure that your superannuation is paid in accordance with your wishes. Alternatively you can establish a reversionary pension depending on your dependents.
It is possible to have your legal personal representative automatically become a director of the corporate trustee on your death. You should review your trust deed to ensure it provides for this and that the process cannot be hindered by any remaining members of the fund.
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Conclusion
If you are considering increasing the number of members in your SMSF you will need to review your current SMSF Trust Deed to see what it allows. SMSFs with several members can provide greater opportunities for investment. However, it is important that all members understand the purpose of the fund and are able to work well together. Steps should be put in place to minimise disputes, particularly to cover members who wish to leave the fund. If we can assist you with your SMSF, including establishing the fund or updating the terms of your trust deed, please contact Tony Crilly at [email protected].