Six Member Self Managed Super Funds - Things to Think About

It has now become legally possible in Australia to set up a SMSF with a maximum of 6 members, as opposed to the previous limit of 4.

The most obvious set of people to take advantage of this will be larger families in business together. Some larger families have been keen to set up a joint SMSF only to be confronted with the uncomfortable decision that some family members cannot be included. This reform should solve this problem for many families in this situation.

That said even those families should carefully weigh up the advantages and disadvantages of setting up a six-member fund. Below we discuss some but by no means all, of the issues surrounding this reform. It is imperative you get comprehensive financial advice before setting up such a fund.

The first obvious advantage is the pooling of 6 people’s superannuation to get some economies of scale when investing. If every member of the family has been contributing to super for awhile this could be quite a significant sum and enable particularly some property investment which is generally less easily traded and divisible than say a share or an ETF.

The other significant advantage of scale will be the potential ability to spread administration costs across a much larger capital base and 6 members. Be careful however, if the 6 members all invest in different things and trade in investments regularly, a great deal of this advantage could be eroded away.

Another aspect that could be labelled either an advantage or disadvantage, is potentially having different generations in the fund with different levels of access to funds and taxation of their funds. This could mean at the fund level it may be possible to be contributing money into the fund and withdrawing at the same time. This may make some strategies possible but be aware there are issues with this, not least that some older members are running their balance down and perhaps too quickly.

The obvious disadvantage or risk is members ceasing to get along with each other. This could simply be disputes about the management of the fund or significant life events such as divorce. Generally, in a SMSF each member has an equivalent say regardless of capital contributed although it is possible to vary this.

The other less likely possibility could be unrelated property investors, who may have traditionally acquired a property collectively with a unit trust, now setting up a 6 member SMSF to do the same. This has the advantage of people being able to access their super to acquire the investment. However, it will come with a high regulatory environment and should come with a very clear written agreement on how the property is to be managed and if and when it might be sold. Any member wishing to exit the fund early will need to recognise they will need to find another investor willing and able to contribute some of their super to replenish the capital withdrawn. If the fund is at its 6-member maximum, it will need to have the cash resources to pay the exiting member out without a property sale. Many people may rightly decide it is too hard and restrictive a structure.

Establishing a 6 member SMSF is a very significant financial decision and whilst we cannot advise you to either set up or not set one up. 

If you would like to discuss the facts and tax law surrounding it, we would be delighted to assist you.