How family super funds can boost wealth

First published in the Financial Review on 6 September 2023.

New rules that allow SMSFs six members rather than just four offer opportunities for transferring assets to the next generation, as well as boosting contributions.

There is little doubt significant demographic and cultural change is underway in self-managed super funds.

Statistics highlight a growing trend that SMSFs are becoming more attractive to a younger cohort. More anecdotally, there is evidence that funds are becoming more multicultural and that the federal government’s decision to increase fund size from four to six members is beginning to garner interest.

As the Australian Taxation Office found in its latest statistical analysis of the SMSF sector, younger trustees drove establishment growth in the 2020-21 financial year, with slightly less than 50 per cent set up by those aged 35 to 44 – the lowest average age ever.

Historically, people tended to wait until they were nearing retirement to transition from a fund regulated by the Australian Prudential Regulation Authority to an SMSF. Not anymore.

Emboldened by research showing SMSFs with a balance of $200,000 are competitive on costs and investment returns, a growing number of younger people want to engage with their superannuation compared with previous generations of the same age.

It’s not just men, either. SMSFs are offering a greater appeal to women, with a continuing trend towards an even split between genders, particularly in these younger age groups.

Having younger people establish SMSFs will slowly change the dynamics of DIY super.

Will they include their children in their SMSF as they enter their adult years, with the four- to six-member rule change making this more feasible? Will their investment patterns change from the traditional SMSF staple diet of blue-chip shares, property, cash, and managed funds? Will more specialist advisers be needed to service them, especially considering their family and work responsibilities at this age?

Specialist SMSF advice is more readily available for those wanting professional input.

Specialist advice is important, given the intricacies involved with establishing and running an SMSF. The advice provider should be licensed and accredited to provide specialist SMSF advice.

The changing multicultural face of SMSFs is anecdotal. But advisers are increasingly relating how they are seeing a shift from the traditional one- or two-member fund, typically Anglo-Celtic with a cultural bias towards a nuclear family structure, to other ethnic groups that often exhibit two traits that make an SMSF an attractive option: small-business ownership; and strong intergenerational relationships.

 Many of these groups have built their wealth via a family business so the opportunity to establish an SMSF, in which their business property can be owned, is a compelling proposition as it allows for the property to be leased back to the next generation – potentially freeing up working capital.

The recent legislative changes providing greater flexibility around super contributions for retirees up to 75 has also provided more opportunities for these individuals to consider the use of vendor-finance as a means of transferring these businesses to children – with a larger window available to contribute the sale proceeds into super.

The four- to six-member rule change may provide additional benefits for such families. But there will also be challenges.

For a start, there will be different tax implications for those on different levels of personal income, at different ages, and different phases within the system.

Then there is the issue of control and communication. For instance, how will decisions be made? Will each member have an individual vote? Or will voting rights be proportional to an individual’s balance in the fund?

If the latter, is there a mechanism that allows the voting system to change as individuals’ balances change?

In any SMSF with more than one member, investment decisions can be a source of friction. Adviser feedback suggests that as these different generations increasingly come together, attitudes towards investing are likely to clash.

For example, while older generations are typically more inclined to favour assets they better understand, such as cash and property, and more disinclined to equities and managed funds, the younger generation is typically more open-minded.

Handling this potential conflict by ensuring all fund members are fully aware of the investment risks and have wholeheartedly signed up to the fund’s investment strategy is critical – underlining the importance of having clear goals and expectations from the outset, as well as agreeing on an investment process that includes how disagreements are resolved.

With the SMSF sector fast approaching $1 trillion in assets, it has become an integral element of the compulsory superannuation system, which the addition of younger people and migrant families can only enhance.

SMSFs will never be for everyone, but increasingly their appeal is becoming far more diverse.

Opinion piece written by
Peter Burgess,
SMSF Association