Considering making the switch from a large industry or retail super fund to a self-managed super fund (SMSF) is a pretty big task in itself. Not only is there are lot of diligence required to properly run an SMSF, there are a number of factors you’ll need to consider on exactly how you want to do it. Just one of many things on your long list of potentials is how many members you are allowed to have - and how many members you want to have.
A new law just recently passed that increased the maximum number of members allowed in SMSFs. This could potentially open up your SMSF to new possibilities - both good and not-so-good (potentially). So, let’s dive into the overarching question: how many members can an SMSF have, and how can this impact your retirement funds?
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What is an SMSF?
Before we dive into SMSF members and how this impacts things, let’s get some contextual information out of the way for all the superannuation newbies. In a nutshell, an SMSF is a private super fund that you manage yourself.
An SMSF is different to an industry or retail super fund because instead of blindly making your super contributions, you are totally in charge. You decide, and are solely responsible for, where and how the money is invested.
However, with great power comes great responsibility. As a trustee, you’re in charge of all the ins and outs of running the super fund, including getting the trust deed sorted, opening a trust bank account, all the accounting, organising the annual SMSF audits, and much, much more.
People that opt for an SMSF instead of a large super fund usually enjoy having control over their own investment strategy. Most people in industry super funds are unable to fine-tune their investment choices, but running a super fund is a lot of work.
How many members can an SMSF have?
Recent legislation passed to increase the number of members allowed in SMSFs. Specifically, the Treasury Laws Amendment (Self Managed Superannuation Funds) Bill 2020 increased the maximum number of members in SMSFs and small APRA funds allowed from four to six members (as of 1 July 2021).
With this new development comes a new opportunity for SMSFs that might be looking to expand or try something different. Typical SMSFs have one to two members, so this new law means these smaller funds have more room to grow.
A guide to single member SMSFs
Despite this new law allowing more SMSF members, many people still opt to do it alone. If you’re looking into starting a single member SMSF, you’d join the 23% of SMSFs that have only one member. Getting started, however, might look a little different:
There are two options for structuring an SMSF single member fund: you can appoint a corporate trustee, or you can have two trustees, and one trustee (you) as a member of the fund.
If you choose to appoint a corporate trustee, the fund can have one or two directors, and the fund member (you) must be either the sole director or one of the two directors. In the case of two directors, if the fund member is also an employee of the director, they must be related.
If you go for individual trustees, on the other hand, there must be two trustees, and one trustee (you) must be a member of the fund. If the fund member is an employee of the other trustee, again, they must be related.
Now you might be wondering what the difference is between these two types of single member SMSFs. There are a few pros and cons to each, but notable differences come into play when setting up the fund.
Establishing an SMSF with individual trustees is relatively simple, with no additional establishment costs or ongoing fees involved. On the other hand, establishing a company to act as a trustee can cost you $800 or more, so it can be quite expensive. But other than the cost, the corporate trustee SMSF structure makes it easier to add and remove members as you see fit, without needing to change the names the funds' assets are held in. Changing asset titles is expensive, time-consuming, and can be downright inconvenient, so this is a big bonus.
How to add a new member to my SMSF
Whether you choose to go down the corporate or individual trustee route, adding a member to an SMSF is always an option further down the track. However, depending on the the trust deed, the question as to whom can join your SMSF (if anyone else can join at all) can be a little more up in the air. It’s also slightly different for each fund type.
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Regardless of the type of SMSF you have, new members must consent in writing to become a member of your fund.
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Additionally, they must sign a trustee declaration from the Australian Taxation Office (ATO) and submit it.
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It must also be discussed, agreed to by all parties, and recorded in minutes at a trust meeting.
The issue of compliance can also rear its head, because any person who wants to become a member of your fund (if your trust deed allows it) must not be categorised as a ‘disqualified person’. Questions like whether they have been convicted of a dishonest offence, are currently bankrupt or insolvent, have been issued with a civil penalty order, or if they have ever been disqualified in the past, must be answered as ‘no’ by the potential new member.
In either case, the ATO must be notified within 28 days if any changes made to your SMSF. These changes might include:
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Trustees
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Directors of the corporate trustee
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Members
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Contact details
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Address
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Fund status
Adding a member to an SMSF with a corporate trustee
If you have an SMSF that’s operating under a corporate trustee, adding new members and removing old ones is pretty straightforward. All you need to do is add them as a director of the company and notify the ATO, and possibly the Australian Securities and Investments Commission (ASIC) if necessary. Since the corporate trustee remains the same, titles of the SMSF’s assets don’t need to be changed or updated.
Adding a member to an SMSF with individual trustees
With individual trustees, you’ll still need to follow the same protocol informing the ATO of any new members joining the fund - you just need to jump through some more hoops too. If an individual trustee is removed or added from your SMSF, the titles of the trusts' assets must be changed. This makes it more costly, time consuming, and overall, pretty annoying.
Where you can update the details of your SMSF
There are a few ways you can let the ATO know you’ve made changes to your SMSF. You can either do it:
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Online through the Australian Business Register
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Through a registered agent
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Over the phone at 13 10 20
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By lodging the paper form 'Change of details for superannuation entities (NAT 3036)'
If you’ve added a new member or trustee to your SMSF, the ATO could choose to review them (if there's a reason to do so). In this review period, the SMSF is taken offline, and the ATO aims to finish its review within 56 days. The reason for this is to “safeguard the retirement of Australians.”
It’s all about trust
Like we mentioned earlier, the trust deed can dictate who is allowed to join your SMSF. Your SMSF's trust deed sets out the rules for establishing and operating your fund, outlining things like the fund’s objectives, who’s allowed to be a member, and whether benefits are paid as a lump sum or as an income stream.
If a person wants to join your SMSF, but they aren’t eligible under your trust deed, unfortunately they won’t make the cut. But if the person eligible to join, for example, is your child your child, spouse of your child, or a family friend (depending on the trust deed), taking the steps outlined above adds them to your SMSF.
An SMSF with 6 members: What are the options?
A six-member SMSF opens up a few new investment strategies for the fund’s trustees, as extra people contributing to the fund could equate to more money to invest.
Notably, the SMSF Association deputy chief executive officer and director of policy and education, Peter Burgess, said that the new legislative change is not expected to result in a significant increase in the number of SMSFs.
The people who are expected to take advantage of the new SMSF tool are families with more than two adult children.
With more pool funds, the six-person SMSF’s investment strategy could now include purchasing property. However, investing in property through an SMSF can be a little tricky, because you’ll need to comply with all of the ATO’s rules.
To add a property to your SMSF portfolio, it needs to:
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Pass the ‘sole purpose test’ of only providing retirement benefits to the fund members
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Not be acquired from a related party of any fund members
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Not be lived in by a fund member or any parties related to fund members
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Not be rented by a fund member or any parties related to fund members
Moneysmart advises assessing the risks of borrowing for an SMSF property, highlighting that it’s more expensive, that you need to be able to repay the loan solely from the SMSF’s money, you can’t make any property alterations until the loan is paid off, and more.
Advantages of six-person SMSFs
If getting into property is a key part of your SMSFs' investment strategy, there are a few other benefits of having a six-member fund.
Potentially, you could invest in more shares, cash, or any other investment the fund already has a stake in. Plus, the running costs involved in operating the SMSF - like the auditing fee, accountant costs, seeking financial advice, and so on - will be reduced per person, because there’s more money available to cover these administrative costs.
Essentially, increasing the members of your SMSF gives you the freedom to do more of what you want. You can choose to invest more in one specific stock that’s doing well, or you can branch out into property - as long as it’s in line with your investment strategy - and operational and administrative fees can be minimised.
Disadvantages of six-person SMSFs
It might sound perfect, right? Unfortunately, nothing is - there are still disadvantages that need to be weighed up before going through the process of adding a new member to your SMSF.
With more people comes exactly that - more people. There will be more voices and opinions involved in all the decision making, which ultimately, leaves room for more indecision. One person might expect certain returns, another might be uncomfortable with any risks - it can just make things a little more complicated.
Plus, even though the number of members allowed has been extended to six people, legislation in some states and territories is yet to catch up. There are some states/territories where an SMSF can still have no more than four individual trustees, which could potentially be an issue when adding new members.
A final note
You might have read this and put adding a new SMSF member in the ‘too hard basket’. If those are your thoughts on the matter, you’re not alone. Most people leave their retirement funds in the hands of the professionals - the big superannuation funds - to secure their financial futures.
But if you’re a savvy investor that wants to be in control of their own money, an SMSF might be right down your alley. Whether it’s just you or you’ll have multiple members, there are a lot of options at your fingertips. Having an SMSF means, from one to six members, you can put as many fingers in as many pies as you’d like.
Image by Timon Studler on Unsplash
Brooke Cooper
