Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Register

23 December 2024

Home / Caveat Emptor

Why only four members in an SMSF?

Question from Stuart Wilson

I would like to know why SMSF's are limited to less than 5 members. My family has in excess of 4 people in it and when including siblings spouses and children, many, many more than 4.

We currently have 4 separate SMSF's which quadruples the costs and time involved in managing the funds. As a very hands on SMSF trustee, we manage all of the investments and try to complete as much of the accountancy work as we can before handing the accounts to the accountant but the costs are still 4 times what they would be if we could run a single SMSF with more members.

Many articles and companies highlight the minimum investment required in a SMSF to make it viable when considering costs, surely and increase in the number of members allowed would enable more people to benefit from establishing a SMSF.

The restriction on membership seems to be an added cost to those people wanting to establish a SMSF.

Thanks, Stuart Wilson

Reply from Ramani Venkatramani, who is an actuary and between 1996 and 2011, he was a senior executive at ISC /APRA, supervising pension funds.

SMSF's predecessor, 'the excluded fund' was regulated by Insurance and Superannuation Commission with all other complying funds, with the idea that those who wish to control their own retirement savings should be able to do so, with basic requirements being met. It was considered that in order for the control to be properly exercised, the number of members should not exceed 4, as the option of going into the bigger sectors (corporate, industry or retail) was open.

Wallis Committee in 1997 recommended its continuation with the regulation shifting to ATO and a prohibition on trustee remuneration. The limit of 4 was retained.

 

While the number 4 itself is arbitrary, the idea is to keep it small and manageable. The possibilities of lifting the number, or changing the definition (to say, all members of a family regardless of number) were suggested during the Cooper review but were not accepted.

 

As there is no limit on how many SMSFs can be set up by someone, for more than 4, two or more SMSFs can be used under the current limit.

(We have also approached ASIC for a response).

3 Comments
Philip La Greca
December 19, 2013

The other rationale for the limit relates to how the decision-making process works in the multi-member funds and the number of members that could be overridden.

The SIS law does not specify so the general principle is a majority of trustees/directors rules. Thus with a two member fund both must agree, for a three member fund then two out of three and for a four member fund three out of four. In these cases then only ever one person's wishes are not met. If we take this to five members however then we end up with three out of five so more members are not satisfied with the outcome.

This would require a statutory basis for decision-making and anything else than a unanimous decision would always result in some low cap of member numbers. Even 75% for a 10-member fund would mean two outvoted members.

If you consider how difficult it is to get 5 people to agree on how to split a lunch bill consider the outcomes when you are talking about peoples retirement savings.

Andrew Bloore
December 04, 2013

This has been an issue which has been discussed over and over and the answer has been the same every time, no change to the numbers. In fact the outcome of this restriction has not been a growth in the number of member it has actually seen the number of members on average decline from 15 years ago when it was approximately 2.2 member on average per fund to where it is today at 1.9. That said families need solutions. There are two different issues here, the first being the tax and structural issues of the fund and who can be a member of it (to a maximum of 4, or more technically correct, fewer than 5) and secondly how to simply manage the assets of the funds efficiently.

Having 2 funds does not necessarily mean you need to duplicate the investment process into two funds. For example you can set up a bare trust to hold all of the assets of many funds and invest them from 1 single pool to make the investment management of the assets simple. Say you have 10 members in the family, you obviously need at least 3 fund structures but you can invest via 1 holding or bare trust and simply account for the position in each tax entity in their correct proportion. This really is a simple administration function. Yes you still need 3 tax returns (one for each fund) but it dramatically reduces the administration time from an accounting point of view and simplifies the Trustees lives. Furthermore the SIS Act specifically allows the trustees to appoint an investment manager - say a patriarch, who can be responsible for managing the group assets.

Everyone seems to focus on the issue of the 4 members rather than saying well if we can only have four members how do I make my life as easy as possible within the legislation. What ends up happening is each fund ends up with different assets and one person trying to work of what goes where. There are simple solutions to all this. As always go to a superannuation professional administrator and ask how to make the fund work for you, not the other way around.

Christopher Dodson
January 11, 2017

Hi Andrew,

I am interested in your comment as I do not believe it is possible for related SMSF's to invest in a bare trust or unit trust which holds anything other than property and cash.

Are you able to provide references on how this can be completed?

 

Leave a Comment:

RELATED ARTICLES

Lending policies can spoil good SMSF strategies

Does a declaration of trust satisfy SMSF separation of asset regulations?

Low SMSF returns highlight value of retirement advice

Firstlinks is sponsored by:
banner

Most viewed in recent weeks

Vale Graham Hand

It’s with heavy hearts that we announce Firstlinks’ co-founder and former Managing Editor, Graham Hand, has died aged 66. Graham was a legendary figure in the finance industry and here are three tributes to him.

Australian stocks will crush housing over the next decade, one year on

Last year, I wrote an article suggesting returns from ASX stocks would trample those from housing over the next decade. One year later, this is an update on how that forecast is going and what's changed since.

Avoiding wealth transfer pitfalls

Australia is in the early throes of an intergenerational wealth transfer worth an estimated $3.5 trillion. Here's a case study highlighting some of the challenges with transferring wealth between generations.

Taxpayers betrayed by Future Fund debacle

The Future Fund's original purpose was to meet the unfunded liabilities of Commonwealth defined benefit schemes. These liabilities have ballooned to an estimated $290 billion and taxpayers continue to be treated like fools.

Australia’s shameful super gap

ASFA provides a key guide for how much you will need to live on in retirement. Unfortunately it has many deficiencies, and the averages don't tell the full story of the growing gender superannuation gap.

Looking beyond banks for dividend income

The Big Four banks have had an extraordinary run and it’s left income investors with a conundrum: to stick with them even though they now offer relatively low dividend yields and limited growth prospects or to look elsewhere.

Latest Updates

Investment strategies

9 lessons from 2024

Key lessons include expensive stocks can always get more expensive, Bitcoin is our tulip mania, follow the smart money, the young are coming with pitchforks on housing, and the importance of staying invested.

Investment strategies

Time to announce the X-factor for 2024

What is the X-factor - the largely unexpected influence that wasn’t thought about when the year began but came from left field to have powerful effects on investment returns - for 2024? It's time to select the winner.

Shares

Australian shares struggle as 2020s reach halfway point

It’s halfway through the 2020s decade and time to get a scorecheck on the Australian stock market. The picture isn't pretty as Aussie shares are having a below-average decade so far, though history shows that all is not lost.

Shares

Is FOMO overruling investment basics?

Four years ago, we introduced our 'bubbles' chart to show how the market had become concentrated in one type of stock and one view of the future. This looks at what, if anything, has changed, and what it means for investors.

Shares

Is Medibank Private a bargain?

Regulatory tensions have weighed on Medibank's share price though it's unlikely that the government will step in and prop up private hospitals. This creates an opportunity to invest in Australia’s largest health insurer.

Shares

Negative correlations, positive allocations

A nascent theme today is that the inverse correlation between bonds and stocks has returned as inflation and economic growth moderate. This broadens the potential for risk-adjusted returns in multi-asset portfolios.

Retirement

The secret to a good retirement

An Australian anthropologist studying Japanese seniors has come to a counter-intuitive conclusion to what makes for a great retirement: she suggests the seeds may be found in how we approach our working years.

Sponsors

Alliances

Site Map

About Firstlinks

© 2024 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.