Think twice before involving family in your SMSF

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MEDIA RELEASE People should think carefully before involving other family members, such as adult children, in their self managed superannuation fund (SMSF), as it may not be in the best interests of all parties, says Andrew Yee, superannuation director at HLB Mann Judd.

“We are increasingly seeing situations where a couple who have an SMSF decide to invite their children to also be members of the fund.

“Indeed the recent proposal to increase the number of SMSF members to six was in part to allow larger families to all be part of an SMSF.

“From the parents’ point of view, it may seem like a good thing to do for their children, so that they can benefit from mum and dad’s investment strategies. However the possible downsides need to be carefully considered, as they may cause serious problems for all members in the long term.”

Mr Yee says that there are several reasons for thinking twice about involving family members of different ages in an SMSF.

“Parents and their children are at different stages in life and therefore have different investment horizons and different requirements from superannuation.

“For instance, parents could be retired or planning for retirement, whereas their children may be just entering the workforce or even still studying; therefore their investment risk profiles are likely to be very different. 

“They will need separate investment strategies in the fund and this would complicate the administration and investment strategy of the fund.”

Mr Yee said an additional complication is if the parents are in pension phase and drawing their pension benefits while other members are still in accumulation phase and contributing to their super.

“In this situation, the fund’s income would be part tax-free, due to the members in the pension phase, and part taxable due to those in the accumulation phase. Not only will this complicate the administration of the fund, but the older members of the SMSF will lose the tax benefits of refundable imputation credits, as these credits would be applied to the tax payable of the younger members.”

Additionally, families also need to consider the legislative and regulatory requirements of an SMSF.

“For instance, all SMSF members are responsible for the administration and compliance of the fund. But do young people want the responsibility, or have the time, of being a trustee of an SMSF in which their parents will have the bulk of the benefits? 

“Another consideration is that if some members decide to travel or live overseas for an extended period of time – something that younger people will probably want to do – then the SMSF may become a non-resident fund, non-complying SMSF, as the central management and control of the SMSF trustees is not mainly based in Australia. A worst case scenario is that the SMSF will be deemed non-complying and lose half of its assets in penalties.”

Mr Yee said parents also need to be aware that if their children, who are members of the fund, are in a relationship that subsequently breaks down, then this could affect the SMSF.

“Statistics show that young people have a higher risk of relationship breakdown and divorce.  If this happens when they are also a member of the SMSF, then the assets of the SMSF will be exposed to the family court.  This could be disastrous for older members who may be approaching, or already in, retirement,” Mr Yee says.