Six Member Self-Managed Super Funds – What you need to consider

On 17 of June 2021 the government after much anticipation passed the amendment bill to allow SMSF’s to have up to and including six members in an SMSF. Six member funds present a great opportunity for mum and dad funds who have more than two children to really make the SMSF a “Family Affair”.

There are many advantages in doing this which include having more money to pool for investment purposes and lower running costs on a per member basis as it is being spread over more members. Whilst these points are clear benefits a significant advantage to members arises if the fund owns a “lumpy” asset such as a commercial property. When an asset of this sort is owned by an SMSF and if it is being rented by the family run business it cannot easily be liquidated to be able to pay out death benefits should one of the members die. From a succession planning point of view having younger and additional members in the fund will generally mean there is additional cash flow available via contributions. This can assist with the payout of death benefit pay without the need to sell the asset and in turn disrupt at a time when family members are grieving.

Whilst there are some very clear advantages in the increase in the number of members, could six member funds be a case of too many cooks spoil the broth?

In considering the addition of more members to an SMSF it is important to recognise the additional complexities involved when there are not only more members but varied personalities and ages even if the members are all related.

1.  Structuring of the Fund

Whilst a corporate trustee is considered by the industry as best practice, having a six-member fund may mean this is compulsory depending on what state your fund is established in. NSW, Victoria, ACT, WA and QLD only allow for 4 individual trustees. Unless the legislation is changed in those states, a corporate trustee is compulsory if a fund has more than 4 members. In any case, even if this wasn’t an issue having to list each individuals name on purchase contracts and bank accounts may also prove problematic for institutions such as banks if there are six members due to the limited spaces available.

2. Roles and Responsibilities

Understanding and agreeing on the roles and responsibilities undertaken by the members of the fund is vital to ensure conflict is avoided and that each member of the fund understands the purpose of superannuation and the fund as an overall structure.

3. Investment Strategy

Given the potential for a vast difference in the age of the members the fund may need to have more than a single Investment Strategy. Younger members may have a higher risk tolerance than older members who may be drawing a pension and are relying on an income stream from dividends and distributions as opposed to capital growth in the fund.

4. Marital Breakdown

Unfortunately, over 40% of families in Australia experience a marital breakup/separation.  As superannuation forms part of an individual’s assets then this can cause added complexities within an SMSF. This is particularly true in the division of assets if there is a lumpy asset such as a property which can then affect all members in the fund if the asset needs to be disposed of.

5. Death Benefit Nominations

The past few years have seen a rise in litigation when it comes to death benefits as the average super balance has increased substantially. When it comes to making a death benefit nomination, it is extremely important that the member making the nomination properly documents and executes the nomination to avoid potential tension and dispute that may arise.

Having all the family involved in an SMSF can be advantageous but it is very important to ensure when heading down this path that all members understand any potential drawbacks and the additional complexities before introducing additional members.