The government has reintroduced its Bill to increase the maximum number of people who can be in a self managed superannuation fund from four up to six. Many are excited about this concept, but is it really a good idea?
While there are clearly advantages to six member SMSFs, there are also downsides. Before diving into multi-member SMSFs (particularly with as many as six members), there are a number of things to consider and advice for advisers to give to members before joining.
Without this, members may find themselves trapped in an SMSF and potentially suffering loss, and could look to recover from advisers who have recommended adding more members to an SMSF.
Disadvantages to six member SMSFs
- Being one of six controllers often does not give you much influence over decisions.
- It can be very difficult for a member to leave an SMSF, as it will usually require the consent of the other directors/trustees/members. Once membership gets to six, this can be more difficult to obtain.
- One driver for six member SMSFs is the ability to have family assets such as business premises in the SMSF. This can make paying death benefits or rolling out even more difficult as liquidity is very limited.
- Death benefit payment decisions will be made by the other trustees/directors. Does the trust deed allow binding death benefit nominations, death benefit guardians and reversionary pensions to ensure the desired result is achieved?
- Decision making will be even more complicated in SMSFs where trust deeds provide for proportionate voting based on member balances (which already can cause significant complications).
Things to consider with six member SMSFs
- How are decisions of the trustee/directors made? Is it by majority, unanimously or some other majority? Are votes weighted by member balance? Should different decisions have different thresholds?
- Does the trust deed allow one member to roll their benefits out unilaterally? Can that member solely sign documents to sell or transfer assets?
- What will happen to my benefits if I die? What can I do to make sure my wishes are implemented?
- If I lose capacity, can my attorney appoint themselves as a trustee/director (without the involvement of the other members/shareholders)? Can they protect my interests?
Advice advisers should give to members about six member SMSFs
- The practical difficulties for members in SMSFs controlling decisions about their benefits, and especially retrieving their benefits and rolling them to a different superannuation fund.
- The risk of control changing if member, trustee or director votes are weighted by account balance.
- The importance of proper death benefit planning to ensure death benefits flow as intended.
- The risk of being trapped in the SMSF and unable to remove benefits, including because of the illiquidity of the assets in the SMSF (as most SMSF trust deeds do not contain adequate provisions to break this type of deadlock).
- Who is my attorney, can that person be appointed as a trustee/director in my place, and what is their ability to influence decisions and protect my interests?
- The benefits of tailoring the trust deed and company constitution to protect the member’s interests.
There are a range of factors to consider before getting into a six member SMSF, and advisers should ensure they are taking clients through them before embarking on a strategy involving multiple members in an SMSF.