Taking control of your superannuation by way of a Self Managed Superannuation Fund (SMSF) is an attractive proposition for many and First Financial has previously outlined the ins and outs of setting up an SMSF.
Perhaps one of the biggest decisions you’ll have to make about your SMSF is how many members it will have, and adhering to the regulations surrounding SMSF members is vital.
As of 1 July 2021, the maximum number of members self-managed superannuation funds and small Australian Prudential Regulation Authority (APRA) funds can have increased from four to six.
This doesn’t mean you need to have six members in your SMSF, in fact, you can set up an SMSF with just one member, but the updated legislation provides an opportunity for SMSFs that might be looking to expand or try something different, to do so.
In this article, we take a look at some considerations to make when deciding on the right number of members for your SMSF.
Choosing SMSF members and structure
An SMSF gives you greater control over your retirement assets and the flexibility to respond to market changes.
When you manage your own super, you put the money you would normally put into a retail or industry super fund into your own SMSF – and take direction from a qualified financial adviser to choose the investments and insurance.
Before you make a decision about the members of your SMSF you need to settle on the structure that best suits your SMSF:
- One with individual trustees, or
- A corporate trustee, which is when a company acts as trustee for the fund.
Reach out to an SMSF professional to discuss which structure best suits your needs, taking into consideration:
- Your personal financial situation
- Fund asset ownership
- The Association costs of each structure
- Member and trustee requirements.
Most SMSFs have two or more members, with six now being the member cap, with all members being trustees of the fund, unless a corporate trustee structure is chosen.
The ATO legislation for member and trustee requirements is best summarised as follows:
| Structure | Features |
|---|---|
| Individual trustees |
As an SMSF is a type of trust, it is important that clients seek professional advice to help understand if their SMSF is impacted by these restrictions. Alternatively, they could restructure or structure their SMSF to have a corporate trustee, where each member is a director of that corporate trustee (see below). |
| Corporate trustee |
|
Single member SMSFs
According to the ATO, single member SMSFs account for 23% of all SMSFs in Australia and despite new laws allowing more SMSF members, in many circumstances, it’s best to do it alone.
A single-member SMSF will be structured in one of two ways.
1. Individual Trustee
For this structure, the single member will be a trustee and another trustee who is not a member is appointed. This non-member trustee can be related to the single member but cannot be linked to the member through employment.
2. Corporate Trustee
For this structure, you choose to appoint a corporate trustee, and the single member is the sole director of the SMSF.
There are a few pros and cons to each structure, and your trusted financial adviser will guide you in the right direction for your personal circumstances.
Adding members to an SMSF
No matter which structure you choose for your SMSF (individual or corporate), there is always the option to add members to your SMSF after the initial set-up – as long as you don’t exceed the member number limit.
If adding members to your SMSF is appropriate, these new members must consent in writing to becoming a member of your fund and sign a trustee declaration from the Australian Taxation Office (ATO).
Adding members to an SMSF under either structure requires notification to the ATO, with notification to the Australian Securities and Investments Commission (ASIC) also required for a corporate structure SMSF.
The ATO must be notified within 28 days if any members are added to the SMSF and also if any changes are made to the SMSF regarding:
- Trustees
- Directors of the corporate trustee
- Contact details
- Address
- Fund status.
There are some people who are not suitable to become SMSF members, even if the trust deed would normally accommodate them.
These individuals may have been convicted of a crime or dishonest offence, are currently bankrupt or insolvent or have a civil penalty issued against them.
Discuss the best membership options for your SMSF with your trusted financial professional.
Six-member SMSF
A six-member SMSF opens up new investment strategies for the fund as extra people contributing will usually mean there is more money to invest.
Essentially, increasing the number of members of your SMSF gives you the freedom to do more of what you want.
You may choose to invest more in the share market or branch out into property investment, but whatever your investment goals are, you’ll need a financial adviser to determine whether it’s in line with your investment strategy and how operational and administrative fees can be minimised.
Some pros of a six-member SMSF can include:
- Families being able to share the fund
- More scope for broader investment focus
- Reduced operating costs per member
- Consolidated administration and investment strategy costs for members.
But all upsides have a downside and some of the potential cons of a six-member SMSF can include:
- Having to keep more people happy – do you all have the same investment goals?
- Varying times for fund maturation – what is the difference in preservation age between members?
- The potential for more complex investment strategies and costs to manage investments
- Implications for estate planning in the case of family member funds.
If you are worried about the implications of adding more members to your SMSF, seek professional advice before you sign on the dotted line.
Strategic SMSF advice
It is crucial to set your SMSF up correctly to ensure you adhere to relevant legislation and take advantage of the tax concessions available to SMSFs under superannuation law.
At First Financial, we work with clients to determine the most appropriate retirement planning strategy for their personal circumstances.
If you have questions about your superannuation and the options available, contact us today.
