Section 17A of the Superannuation Industry (Supervision) Act 1993 (Cth) (SISA) sets out the requirements that a superannuation fund must meet in order to be a self-managed superannuation fund (SMSF).
The extension of fund membership from four (4) members to six (6) members was introduced by the Treasury Laws Amendment (Self Managed Superannuation Funds) Bill 2020, which was passed on 17 June 2021. This change to the definition of an SMSF appears to reflect the desire to include an entire family in a single, larger SMSF. However, there are some important factors that should be advised upon and considered on a case-by-case basis prior to adding additional members to a fund.
What are the Pro’s of Additional Members?
Potential positive outcomes of increased membership include the ability of a SMSF to access increased funds for investment. These additional funds potentially provide greater flexibility for where the funds can be invested, and therefore theoretically provide the opportunity for greater returns. As with all investment activity though, the risk of greater returns is countered by the risk for greater potential losses as a commercial reality of the risk inherent in investing.
Further, increased membership in SMSFs allows families of six (6) to account for membership of the entire family in a single SMSF. This saves the SMSF fees incurred if the family had previously required two (2) SMSFs to include all family members.
What are the Con’s of Additional Members?
The potential concerns regarding the addition of more members in a SMSF include:
Majority Shift
The older members of a SMSF will generally hold the higher member balances, and thereby have made the greater financial contribution to the funds available in the SMSF for investment purposes simply due to their longer period in the workforce and the accumulation of superannuation contributions over that span of time. Previously in a SMSF with a maximum of four (4) members, the older members of the SMSF, the ‘Mums and Dads’, generally speaking, held an equal balance of power with respect to decision-making and (hopefully) the SMSF Trust Deed provided them with the final say in the event of a deadlock between the members. However, this power dynamic will shift with an increased membership of six (6) members. The addition of members to a SMSF will mean that the children (again, generally speaking) will then hold the decision-making power with the numbers to make up the majority.
Leaving aside the potential for family dynamic changes and conflict, the reality is that a wise financial investment regarding retirement savings investment for a person nearing the end of their working career will look very different to the decisions of the person who has many working years ahead of them. A younger SMSF member may be content with investing their retirement savings in higher risk options, whereas a person nearing retirement will generally want to preserve their retirement savings and choose seemingly safer investment options to achieve this goal. Whilst making everyone a member of a single family SMSF seems like an efficient option, the impact on investment strategy is tricky to navigate to ensure the risk appetite and the different stages of accumulation are accounted for satisfactorily.
Removing Members
When considering the membership implications of SMSFs, it’s important to remember that once a person becomes a member of a SMSF, then it is not a simple process to have that person removed from the SMSF (if they do not consent to the removal). Regulation 6.29 of the Superannuation Industry (Supervision) Regulations 1994 (Cth) requires the written consent of a member to their removal from a SMSF. This means that in the case where there is a relationship breakdown between members, it is not a simple majority vote process to effect the removal of a member who may no longer be aligned with the other members of the SMSF. In fact, to remove the member of a SMSF even when there is conflict and dissent amongst them, one must obtain the written consent of the person to be removed. This is obviously problematic in the instance where the estranged member withholds their written consent to removal. It means that an estranged member in that situation will continue to participate in the decision-making of the overall SMSF, ultimately affecting the retirement savings of all of the members. We note that this can be managed by making children (or new members of existing SMSFs) conditional members.
Final Note
Increasing the membership in an SMSF makes the drafting of the Trust Deed more crucial than ever. The Trust Deed should be tailored to the membership composition of each individual SMSF and should not be an ‘off-the-shelf’, ‘one-size-fits-all’ Deed. The Trust Deed needs to be carefully drafted to consider the potential for conflict and difficulties in the future and account for the unique composition of each SMSF, their members, and their retirement savings.
Our team are highly experienced in matters relating to superannuation and self-managed superannuation funds, including experience working for the Regulator. If you need assistance in relation to superannuation law matters, please contact Jenkins Legal & Advisory on 02 4929 2000 or email office@jenkinslegal.com.au.
This article is not legal advice and the views and comments are of a general nature only. This article is not to be relied upon in substitution for detailed legal advice.