Do More Members in a Fund Mean More Opportunities?

The Federal Government, on 27 April and again on Budget night, announced a proposed increase to the maximum number of members permitted in an SMSF and small APRA fund from 4 to 6.  This proposal will take effect from 1 July 2019, if legislated.

 

This is an exciting development as it provides advisers and clients enhanced opportunities to use their SMSF as a broader family retirement vehicle.  Planning opportunities for live inheritances with this increased membership will help clients grow the retirement wealth of family members, and in addition provide support to SMSFs with lumpy assets, to counter requirements to pay out a death benefit.

Take the following example:

Paul and Mary have a SMSF.  They each have $2 million in the fund and their SMSF holds property worth $3.5 million and cash of $500,000.

They have 4 children, who each will have a balance of $100,000 upon Paul’s death.  Paul’s income stream is reversionary to Mary and to manage the transfer balance cap, Mary will need to withdraw $400,000 as a lump sum from the fund.  However, doing so will place increased cash flow stress on the SMSF,  to meet the pension requirements Mary has annually.

By admitting the 4 children as fund members, their rollovers can be used to fund the death benefit lump sum required.  The children could also ensure their super contributions are paid to the SMSF and provide additional cash flow buffer for Mary’s pension payments annually.  Any excess pension payments by Mary, subject to total super balances, could be used as non-concessional contributions for the children, which can also assist to ensuring the property asset can remain in super for future generations.

Similar to the above example, parents may consider live inheritances by assisting children with concessional contributions, with the removal of the 10% rule, and still have greater control over how these funds are invested.

For those looking to take advantage of the increase to 6 members, corporate trustees are likely to become even more attractive given extra signatories required, for administrative ease, and also to counter trustee penalty provision, although extremely rare.  A lot of control needs to be considered as mum and dad may be out voted by their kids.

While the devil is always in the detail, advisers should open the dialogue with clients who may be able to take advantage of these new rules.  Planning in advance will be crucial to creating the most proactive response possible.

 

Disclaimer: The information contained in this document is general in nature only.  Professional advice should be sought before acting on any aspect of this document.  Liability limited by a scheme approved under Professional Standards Legislation other than for the acts or omissions of financial services licensees . TAG Financial Services Pty Ltd (ABN 67 075 374 686).