From 1 July 2021, Self-Managed Super Funds (SMSFs) will be permitted to have up to 6 members. This change allows greater flexibility for larger families.
A family group of say 2 parents and up to 4 children can now be members of the same fund, rather than multiple SMSFs under the current law. The savings in the administrative costs alone on the two funds would be significant.
Looking to get more into your super fund?
With children as members, the parents (assuming they each have a greater earning capacity than their children) can use the contributions caps of each child to increase what goes into super by making contributions on behalf of the children.
Increased borrowing power
Financiers lending to an SMSF to assist it to buy a rental property, will often struggle with the possibility that the loan’s servicing requirements may not be met out of the rental income earned and the members’ annual contributions. A tenant may be lost and the property sit vacant for a while, or a member may lose the job for a period and as a result, super contributions are interrupted. Both may leave the fund unable to make the loan repayments.
Having more members in the fund will ease the financier’s concerns, as super contributions for a maximum of 6 members can now find their way to the fund, rather than only 4 or less.
Situations where a previous loan application may have failed due to the serviceability risk, may now succeed.
Initial Funds for Property Deposits
Similarly, many members use the opportunity to make $100,000 non-concessional superannuation contributions to provide the fund with the seed capital for a deposit on a property purchase for the fund. Furthermore, if say 2 parents are under 65, they can use the ‘bring forward’ rules to contribute $300,000 each in one year into the fund. With 6 members in similar situations, this figure can now conceivably be as high as $1,800,000. This is more than enough for a substantial deposit and to satisfy financier’s 30% deposit:70% loan ratios.
Create a Nest Egg for Children
High net worth individuals will also be in a position to plan for their children's future by making contributions into a child's super account. Super can now become another weapon in the arsenal of Estate Planning tools as it will enhance and streamline the intergenerational transfer of wealth.
The changes will ultimately result in increased funds being deposited and retained in super and therefore taxed concessionally.
Fund trustees are charged with the responsibility to adopt an investment strategy that suits the needs of the fund’s members. The new law may see issues arise because of the differences in members’ ages given the different investment choices for those facing retirement, as compared to younger members who have longer investment time horizons than their parents.
While there remains a lot of latitude over the structure of an acceptable investment strategy, the current investments strategy will need to be re-examined to now consider the needs of the new members.
If the strategies are incompatible, maybe the parents should remain in one fund and the children in another.
How to Make It Happen
If you intend to add more members to your SMSF, you should ensure that your SMSF trust deed allows the fund to have more than 4 members. If your deed does not allow this, and if the deed can be varied (usually the case), then the fund will need an inexpensive Deed of Variation.
Appointment of New Members/Trustees
If the trustees of the fund are individuals, each individual trustee of the fund must be a member of the fund and vice versa.
Trust law in various States only permits a maximum of 4 trustees in a trust (a super fund is a trust). Unless Trust law changes, to take advantage of the changes in the Superannuation Law, you will have to appoint a company as the fund’s trustee instead of individuals.
This is not such a bad thing. The super fund will have made investments into various assets. If the fund’s trustees are individuals, the new trustee’s names will have to be registered with all those investment targets. Having multiple individuals as trustees is unwieldy and makes registration of assets in the name of the SMSF difficult (for example, brokers and ASX company’s Share Registrars will not allow more than 3 people to be listed as owners of shares).
In the case of SMSFs with a corporate trustee, the additional members only need to be appointed as directors, and ASIC notified of their appointment. There would be no need to change the name of the trustee on each of the fund’s investments.
Minors as Members/Trustees
With the increase to 6 members, families are more likely to use SMSFs to admit children to the family fund.
However, minors cannot act as trustees or directors, so the SMSF's records must reflect that the child's parent or guardian is appointed and acts as trustee/director of the trustee 'in place of the member'.
Self-Managed Super Funds are one of our specialities at May Klye & Associates. We constantly assist clients with their superannuation and retirement planning. If you need advice, call Noel or Amanda on 03 9585 7555 or email us at email@example.com.