SMSF Membership is Not Necessarily a Case for the More the Merrier

Section 17A of the Superannuation Industry (Supervision) Act 1993 (Cth) (SISA) sets out the structural requirements that a fund must meet in order to be a self-managed superannuation fund (SMSF). The recent 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 the allowable composition of a SMSF appears to reflect the desire by some to include an entire family in a single, larger SMSF. However, before rushing out to issue membership invitations there are some important factors that should be advised upon and considered on a case-by-case basis.

Positive Outcomes of More 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 of 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 fund fees incurred if the family had previously required two (2) SMSFs to include all family members.

Concerns regarding adding More Members

The counter arguments to the above potential positive outcomes include:

1. More Members Means a 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 do so.

2. 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.

Drafting the SMSF Trust Deed

Additionally, increased 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.