Six Member SMSF Changes Explained
From 1 July 2021, self-managed super funds (SMSF) and small APRA funds (SAFs) will be able to have up to six members instead of the previous cap of four.
A self-managed super fund - or SMSF - is regarded as a private super fund that you manage yourself, as opposed to an industry or retail super fund.
When you make the choice to manage your own super, you put the money you would normally allocate to a retail or industry super fund into your own SMSF instead. One of the key points of difference is that you also choose the investments and the insurance to protect (and ideally grow) your financial assets. SMSFs allow up to four members, usually consisting of a family unit. However, amendments introduced via the Treasury Laws Amendment (Self Managed Superannuation Funds) Bill 2020 now means that an SMSF can have up to six members.
Although the changes have been in the pipeline for quite some time now, the increase was first put forward in the Federal Budget by then Treasurer, Scott Morrison. This followed a recommendation by the Super System Review (or Cooper Review) in 2010 to increase the maximum number of members from four to ten. The proposed changes bounced around Parliament for a number of years, before finally being passed on June 17, 2021.
With an aging population, many Aussies can see the light at the end of the working tunnel, and have taken charge of their own financial future in droves. In fact, more than one third of Australians now self manage their superannuation funds - so what do the changes mean for them, and is adding more members to their SMSF a good idea or not?
Your Guide To The New SMSF Changes
When you make the conscious choice to manage your own super via an SMSF, you take on the responsibility that would normally be taken care of by a retail or industry superannuation fund. One of the major points of difference between the two is that if you’re in the process of setting up a self managed super fund, the fate of your finances is in your hands. For many, that’s actually the primary attraction to this method, as it’s up to you to choose the investments and insurance policies to protect - and ideally grow - your financial assets for your retirement.
SMSFs are established for the sole purpose of providing financial benefits to members in retirement and their beneficiaries on death. This superannuation management method allows up to four members, and unsurprisingly usually consists of one family unit. They have their own Tax File Number (TFN), Australian Business Number (ABN) and transactional bank account, which allows them to receive contributions and rollovers, make investments and pay out lump sums and pensions.
Currently, over 70% of SMSFs have just two members, and those with four members represent only 4% of the SMSF population. According to industry experts, while the use of six member funds is likely to be small, it also adds additional choice and flexibility. Because of the very nature of a self managed super fund, it’s mostly family units that opt for this form of planning for the future.
For families with more than four members, previously the only real option was to create two SMSFs which of course incurred extra costs in managing it, or to place their superannuation in a larger fund. Now, a larger SMSF fund of six members can also offer a level of protection if a fund member is travelling overseas for a prolonged period of time. Amongst other things, the residency rules require 50% of members measured by market value to be in Australia, meaning that more members allow greater flexibility in the management of the SMSF as well as meeting the relevant legal obligations that come with them.
The new changes to self managed superannuation funds will also have an impact on estate planning, particularly with tax-effective intergenerational wealth transfer as the assets of a fund generally are not part of the estate. An example of this is a family owned business that holds commercial property in their family SMSF. If the parents of this fund were to pass away, the children have the option to keep running the business, while still maintaining the commercial property within the SMSF as an asset. Holding assets within an SMSF can also potentially provide a level of protection against creditors.
However, issues can arise when members of the SMSF have different investment needs, and these issues only increase with more members. The overall investment strategy of the SMSF may not meet the requirements of all members, such as what can happen with a fund with parents close to retirement, but their children are more focused on long term strategies. Steps also need to be taken to ensure that when a member of the fund dies, their wishes are respected. Members need to consider things like appointing a legal personal representative as trustee, reversionary pensions or binding death nominations.
Needless to say, overseeing a self managed super fund is a lot of work - even if you get help from the professionals to do so. Trustees need time at their disposal, both to research setting up a self managed super fund and time to manage the ongoing activities related to the account, such as exploring investment opportunities, executing an ongoing investment strategy, accounting, record keeping and annual audits by an approved SMSF body.
SMSF trustees spend an average of eight hours per month managing their SMSF, equating to over one hundred hours per annum. It’s a big task, but if managed properly and depending on your objectives - can all be worth it.
Managing Your SMSF With The Professionals
In addition, the laws and legislation that surround self managed super funds shouldn’t be taken lightly either. If the Australian Taxation Office considers there to be a breach of these obligations and responsibilities, it can impose high penalties on trustees who face personal liability, with serious breaches resulting in imposed tax rates of up to 47%. Needless to say, you’re going to need the help of a licenced professional if you want to get self managed superannuation right.
At Muro, we are more than just accountants - we offer our clients strategic business advice, and ongoing support to help them reach their business and financial goals. Just one of our many services includes helping our clients to navigate the complexities of self managed superannuation funds, to ensure that their super is working for them. Get in touch with us at Muro today to ensure that you’re on the right path for success as we head into 2021.