In a recent article, Townsends Business & Corporate Lawyers principal Peter Townsend said upcoming changes around who is eligible for super that will apply from 1 July 2022 may again raise the issue of adding children as members to an SMSF.
From 1 July 2022, employers will need to pay super for their employees who are under 18 years old if they work more than 30 hours in a week,” Mr Townsend explained.
“This is the result of the $450-per-month minimum threshold for super guarantee payments being removed so that employees who are under 18 will be eligible for super if they work more than 30 hours in a week, regardless of how much they’re paid.”
Mr Townsend said while teenagers may not necessarily meet the 30 hour test, it possible that they will if they work more in the school holidays for example.
The ATO is clear that super is payable in respect of any week where the 30-hour test is met.
Given that they are likely to have “annoyingly small amounts of superannuation”, Mr Townsend said some parents may consider whether it it more cost-effective to have the super paid into their SMSF.
This way, they may avoid the small superannuation balance being eaten away by fees in a public offer fund.
“In an SMSF the costs can be controlled more carefully, will be shared with the other fund members, and can be proportional to the size of their account,” he said.
Mr Townsend noted that children will not be a director of the corporate trustee until they turn 18.
“Until then, their parent will represent them on the board of the corporate trustee, he stated.
SMSF trustees who are considering this, he warned, will need to check their trust deed and governing rules of the fund to determine whether the rule permit child members.
The investment strategy would also need to be update, he said, as the investment needs of a young person are very different to those that might apply to their parents.
There also needs to be consideration around safeguarding the parents’ interests in the fund once the child reaches 18, he added.
“This is most often achieved through the rules of the fund permitting members to vote based on the size of their member balance in the fund. As the parents will likely have much more in the fund than the children, the size of the parent’s voting bloc ensures their control,” he stated.
“Don’t forget the voting on the board of the corporate trustee and at a shareholders’ meeting of the corporate trustee. The constitution of the company should be amended to ensure the parents’ votes at both types of meetings will ensure control is not lost.”
In the alternative, given the new requirement for choice of super to consider the stapling requirements and, the capping on fees for balances below $6,000 is the admission of children to a SMSF the best approach?
Would it be better to explain both of the above protections now available and help the child get started on their own super management. Many APRA funds allow under 18s to be members and, the investigation is yet another part of essential financial literacy the parent can assist the child develop. (The issue with being under 18 is that you cannot be contractually bound so the big funds maybe concerned that you can’t agree to be bound etc and therefore, may require a parent to join the application as a LPR.)
It is similar (in process) to helping a child navigate a mobile phone contract. There is a lot of financial literacy lessons required there and the importance of research being the first lesson.
The sooner they get some guided exposure, the more empowered they will become over-time. A SMSF is complicated without having been exposed to any superfund membership.
The costs of financial advice is a big conversation piece ATM and there is no panacea to fix the system however, building financial literacy from a young age is a good step towards giving people some initial tools to navigate the process.