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First published in the Financial Review on 15 October 2020.
Small businesses and families with pooled assets could find extra flexibility as well as lower fees by taking advantage of the relaxation of the size limit.
The federal government has introduced legislation to Parliament to increase the limit on the number of members in a self-managed super fund from four to six.
Although it’s unlikely to affect many SMSFs – about 93 per cent of funds have only one or two members – for a minority, it will provide additional flexibility and choice without raising any substantial integrity or administration issues.
For those SMSFs that will want to take advantage of this proposed legislation, four reasons stand out: lower fees; the capacity to pool balances, thereby increasing investment choice; increasing engagement with superannuation; and improving estate administration and exit planning.
Fears that increasing the size of SMSFs could give rise to opportunities for elder abuse and complex estate planning disputes should not be dismissed. But neither should they be exaggerated. These problems are already occurring and can even be driven by non-members.
Adding more members to an SMSF is not expected to threaten the stability of the SMSF sector. On the contrary, it should provide additional flexibility for those who want to use this change. But it’s prudent to get specialist advice before venturing down this path. Forewarned is forearmed.
Increasing the number of SMSF members means individuals can enjoy the benefits of consolidating assets by increasing both the investment opportunities and allowing greater flexibility to diversify.
Anecdotal evidence suggests most three- or four-member SMSFs have been established to allow all family members to be in the same SMSF or to pool superannuation balances to buy a chunky asset such as real property. This has been given impetus by the reductions in both the concessional and non-concessional caps, limiting the ability for individuals to contribute money into their SMSF to allow sizeable acquisitions.
Combining two SMSFs into one could save about $2000 a year.
A prime example of this is small business owners shifting their business premises – known in the Superannuation Industry (Supervision) Act 1993 as “business real property” – to their SMSF. This allows small business owners to transfer their most significant business asset to their SMSF, increasing their ability to save for retirement.
Many are focused on reinvesting in their business instead of contributing to super, so having a business property in super that accumulates in value over the years can throw them a lifeline when they retire.
Typically these businesses are family-owned, emphasising the link between the ability to add more family members to an SMSF and business real property. An increase to six-members may also spur small business growth by allowing prospective business partners and their spouses to pool retirement savings to acquire a property.
Different strokes
Importantly, though, SMSFs can have different investment strategies for different fund members – potentially critical if the fund spans different generations. In other words, members can choose a risk profile appropriate to them and not one designed for a collective.
Fees are another important consideration. Including more members in an SMSF is likely to lower fees because SMSFs are typically charged on a fixed administration basis regardless of the number of members and without consideration to the SMSF’s balance. Pooling super balances in one SMSF can avoid the costs of running separate SMSFs.
Further, if the pool of assets is increased in an SMSF by including more members, the fund will become more cost-efficient as the fees reduce as a percentage of the total assets of the fund. Combining two SMSFs into one could save about $2000 a year.
From an intergenerational perspective, if children and family members have knowledge about and are part of how their parents’ affairs, finances and superannuation are being managed, this familiarity can facilitate improved and more timely engagement with superannuation and estate planning across generations.
The Senate Standing Committee on Economics is holding an inquiry into the legislation – Treasury Laws Amendment (Self-Managed Superannuation Funds) Bill 2020 – with its findings expected soon.
Opinion piece written by
John Maroney, CEO,
SMSF Association