My clients want to use the new 6 member rule for their SMSF to include their 4 children – can they? Should they?

The first question is simple – they can. This legislation has passed and takes effect from 1 July 2021. The second question is harder – there are a number of factors to think about before diving into a 6 member SMSF.

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 (eg 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. (And of course it doesn’t preclude the children from having the bulk of their super in their own SMSF with their spouse.)

If these are attractive to your client, the ability to have 6 rather than 4 members may make the difference between being able to have all children in the SMSF vs just some. 

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. More often, any disconnect between the preferences of the people who feel most invested in the fund (their balances are the largest) and the decisions made by the trustee just results in resentment.
• 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. At what point will the arrangement have outlived its useful life and either some of the members will exit or the fund will be wound up? To what extent do these need to be agreed and committed to up front? These are not usually major considerations for two member SMSFs.
• 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! (And in fact neither is anyone else.) 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. So right now, your client 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 (see this page on our website), 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. Of course, this is where digital signatures really come into their own! 

Given how few SMSFs we see with more than 2 members, we expect the change in law won’t suddenly result in a lot of 6 member SMSFs.

That said, they may offer specific benefits at key moments in the life of an SMSF. For example, some SMSFs have reserves that they have been trying to wind down over many years. The members (parents) have been reluctant to include the children in the process – which would allow the reserves to be allocated out more quickly – because their 3 children can’t all belong to the fund at once. Now that they can do this, maybe they will.  

Or maybe an SMSF owns a major family asset (e.g. the farm or a large business real estate property) that no-one wants to see leaving the fund for good tax reasons. The ability for all children to tip some or all of their own superannuation into the fund (and continue to support it with ongoing contributions) may make it possible to keep the asset right where it is, even as the parents draw down their balances via pension payments or die. Again, the 6 member SMSF makes this possible for larger families.

Personally, I don’t belong to my parents’ SMSF and I’m not going to invite my children into mine…. yet. While we’re a family that’s always been very transparent with finances, I don’t have investments that I particularly want to manage with either my parents or my children. But as I look into the (very distant, old age) future, I do wonder if there will be a time when my sons are playing such a significant role in my financial affairs that belonging to my SMSF will make sense. If my parents feel the same way, they will certainly value the 6 member SMSF opportunity as they would definitely want all 3 of their daughters to be treated the same way. (They must know that if I was the only extra member I’d run away with the money as soon as they were out of the picture.)

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