Earlier this month, the government reintroduced the measure to increase the number of members allowed in an SMSF from four to six back into Parliament.
For clients who are considering adding additional members to their fund or establishing an SMSF for the first time if the measure is legislated, BT head of financial literacy and advocacy Bryan Ashenden said it will be very important for advisers to consider what has actually changed with their client’s circumstances.
“If you’ve talked about an SMSF in the past with them and they’ve said no, and are now reconsidering it because of the opportunity to maybe have six members in there, what has actually changed? Is there an actual circumstance that has changed beyond just the maximum number of members?” Mr Ashenden questioned.
“Is there a change in their circumstances that now actually says an SMSF is going to give a better result than something else would? There needs to be a justification for it. If they’re not going to be doing anything different to what they could have done in the retail environment, then you need to question whether it’s the right thing to do.”
Mr Ashenden said advisers will also need to think about the longer-term implications of adding additional members or establishing an SMSF.
“If there are six people in the fund, how complicated is the fund going to be to operate? What’s going to happen when someone dies? How well do all those trustees actually understand the implications of being in an SMSF and understand their roles and responsibilities,” he said.
“I suspect this is something the regulator might look at when they start to see funds set up with five or six members.”
If the adviser does decide that adding additional members to the fund or setting up a fund is appropriate, Mr Ashenden said there are also considerations that will need to be made in relation to trustee structure and trust deed.
It may not even be possible to use an individual trustee structure depending on what state the client is in, he said.
“You also need to be very conscious of what the actual trust deed itself says because, just because superannuation law is going to change to allow six members, the trust deed may not allow this,” he said.
“For existing clients, you also need to think about how you’re going to achieve a fund with more members. Are the clients planning to set up a brand-new fund with six members, roll everything across and then close the old fund? Or will they look to grow their existing SMSF?”
These kinds of decisions will also require trust deed amendments, he stated.
Where there are two SMSFs that have been set up previously, advisers will also need to think about how those two funds can be merged together.
“You also need to think about the FASEA code considerations about acting in the best interests of each of the clients because each member is a client in their own right, and is it the right thing for that client to move to a bigger SMSF? What are the longer-term implications?” he cautioned.
Reading publications such as this you see that SMSFs are wonderful vehicles for hosting ugly and damaging disputes amongst selfish and dis-honest family members, especially following death of a member. This capacity is about to increase by 50%. Except that something like 70% or more of SMSFs have only two members, so what’s the pressing need to increase membership to 6?
Whilst I am not a fan of intergen SMSFs the potential to invite up to 6 members may have some application. The SMSF Statistics published by the ATO indicate that as at June 2018, 12.2% of members are +75. The opportunity to admit younger members may provide longevity for these funds and help to avoid that urgent scramble in the event of death or capacity issues presenting in one of the founding members. The other potential benefit for some SMSFs would be for an element of building financial literacy of family members. This of cause requires commitment and a degree of functionality. I agree with Bryan, there are many trips and traps for some SMSFs.