The accounting firm’s superannuation director, Andrew Yee, said while there had been increasing interest from SMSF trustees around adding their children to their self-managed fund, doing so often had unforeseen consequences, including a reduction in tax benefits if the parents were retired.
“In this situation, the fund’s income would be part tax-free, due to the members in the pension phase, and part taxable due to those in the accumulation phase,” Mr Yee said.
“Not only will this complicate the administration of the fund, but the older members of the SMSF will lose the tax benefits of refundable imputation credits, as these credits would be applied to the tax payable of the younger members.”
He added that given millennial clients’ preference for long-term overseas travel, this could also cause administrative problems and possible compliance breaches for the fund.
“Another consideration is that if some members decide to travel or live overseas for an extended period of time, the SMSF may become a non-resident fund, as the central management and control of the SMSF trustees is not mainly based in Australia,” Mr Yee said.
“A worst-case scenario is that the SMSF will be deemed non-complying and lose half of its assets in penalties.”
He said older trustees also needed to consider that their adult children were more likely to be involved in a relationship breakdown at some point in their lives, which could put assets in the SMSF at risk.
“Statistics show that young people have a higher risk of relationship breakdown and divorce,” Mr Yee said.
“If this happens when they are also a member of the SMSF, then the assets of the SMSF will be exposed to the family court. This could be disastrous for older members who may be approaching, or [who are] already in, retirement.”
Seems to me three easy solutions. First use a deed where the younger members have a distinct sub-fund so sets investments apart from older members investments. Secondly any imputation credits used by the younger members have a compensation payment to the older members – a standard practice for industry funds. Finally where children are overseas use the ATO EPOA ruling which covers this exact situation and how to remain an Australian super fund under section 295-95(2) of the ITAA 97. At the end of the day we are there to solve clients problems – if they want a family SMSF don’t think it’s too hard, create a bespoke family. SMSF and charge more for doing so.