The decision to include other family members in a self-managed fund is not straightforward, as it involves bringing in members with different investment horizons and requirements.
HLB Mann Judd superannuation director Andrew Yee says his firm is seeing more couples who have an SMSF wanting to invite their adult children to be members of their fund.
Yee says: “A lot of parents like to provide for children in whatever way they can. If they have an SMSF they want to open that up.”
An SMSF can have a maximum of four members. The Government had proposed to increase that limit to six but the change never went through.
Yee says: “From the parents’ point of view, it may seem like a good thing to do for their children, so they can benefit from mum and dad’s investment strategies.
“However, the possible downsides need to be carefully considered, as they may cause serious problems for all members in the long term.”
Yee says parents could be retired or planning for retirement, whereas the children may be just entering the workforce. Their investment risk profiles are likely to be very different.
“They will need separate investment strategies and this would complicate the administration and investment strategy of the fund.”
There are additional complications if the parents are in pension phase and drawing their pension benefits, while other members are still in accumulation.
“It could add to cost if you have separate strategies and advisers.”
The question of what is the optimal size for an SMSF has been the subject of a lot of discussion since the Government raised its six member proposal. Some commentators are more positive in their view about larger SMSFs.
Stephen Hogg, head of SMSF at Omniwealth, says most three or four-member SMSFs have been established to allow family members to be in the same fund or to pool assets to purchase a large asset, such as a property.
“Over recent years we have seen as gradual reduction in both the concessional and non-concessional contribution caps. This limits the ability of SMSF funds to accumulate funds to purchase assets such as property,” Hogg says.
For Hogg, key areas of concern would be reaching agreement among a larger membership on how investment and other decisions are made.
“Estate planning considerations upon the death of a member will need to be well covered to avoid any dispute on the death of a member, which may affect the fund’s assets,” he says.
SuperConcepts executive manager SMSF Technical and Private Wealth, Graeme Colley, says a membership increase does offer benefits. For some it could mean greater flexibility, particularly for small businesses with multiple owners who wish to pool their super into one fund.
“Also, it could benefit families wanting to ensure an intergenerational transfer of assets, especially business property,” Colley says.
Colley says that on the downside a fund with more members will be more complex administratively.
“There’ll be the need to make investment decisions for a larger pool of members. And this may lead to a more conventional investment mix than would have otherwise been the case. And there would be greater risk of disputes.
“Think of the scenario where children out-vote their parents on investments, estate planning decisions and other fund matters. Outcomes could be inequitable.”
Six members would also result in more frequent membership changes, as members move on or pass on. This would place strain on fund administration and associated costs.
Allowing funds to have up to six members underlines the importance of appointing a corporate trustee for an SMSF, Colley says.
Yee says older members in retirement may lose the tax benefits of refundable mputation credits, as these credits would be applied to the tax payable of the younger members.
Yee says: “Another consideration is that if some members decide to live overseas for an extended period, the SMSF may become a non-resident, non-complying fund.”