Well … as expected, this year’s Federal budget was quieter for SMSFs and super than some years. The main impact on SMSFs was an increase in the maximum number of members from four to six, three yearly audits for funds with good track records and a possible increase to the supervisory levy. Let’s look at the increase to six members and the impact on fund operations. We’ll get to the others in future if they take place.

An increase in the number of members may bring a range of benefits. For some it could mean greater flexibility, particularly for small businesses with multiple owners who wish to pool their superannuation into one fund. Also, family businesses could benefit by providing better access to an intergenerational transfer of assets owned by the fund, especially business property. More members are likely to permit greater access to a larger pool of assets accumulating in the one SMSF rather than having to spread things over many funds.

An increase in the number of members and, potentially a higher value in assets accumulating in funds with more members, may provide some benefits if the limit to franking credit refunds ever comes about. Excess franking credits could be absorbed in the fund and offset against non-franked income and taxable contributions.

Looking at the statistics of fund members – more than two thirds of SMSFs have two members, just over 20% have one member and about 7% of funds have three or four members. While the potential impact may sound significant, any change may have a marginal impact on the SMSF sector.

One possible issue for SMSFs that take advantage of the increase could be increased administrative complexity. Any decisions made by the fund could impact on a larger pool of members. It could mean up to six individual trustees or six directors of the corporate trustee would be making decisions about the future of the fund.

Research has shown that the more members (read trustees as well) a fund has, the more conventional the decisions impacting on the fund. As the number of fund members increases, investment decisions by trustees have a tendency to be less risky. In other words, the research seems to indicate, group-think leads toward more familiar and ‘safer’ investments like cash, term deposits or domestic equities. So, funds wishing to expand their membership may need to take care to properly identify and address behavioural factors, which may end up in resulting in a lower long-term return.

More members may also mean a more decentralised fund with less desirable outcomes. Think of the scenario of children who are members potentially outvoting their parents on investments, estate planning and other fund administration issues. The outcome could be undesirable and inequitable – not good.

Six members could also result in more frequent membership changes as some members pass on or decide to move to their own SMSF or a publicly offered fund. Given the higher likelihood of membership changes and the greater frequency of various events occurring, there could be an impact on the complexity of fund administration and associated costs. Allowing funds to have up to six members further underlines the importance of appointing a corporate trustee for an SMSF. In addition, a fund with a corporate trustee would be penalised only once with a breach. In contrast, individual trustees who breach the rules could each be penalised personally for the breach.

The increase to six SMSF member/trustees may provide some benefits for trustees and members to pool assets that would be spread across a number of SMSFs. However, there seems to be a downside in the efficiency in fund administration as well as investment decisions and performance.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.