A self managed superannuation fund can have no more than four members to remain ‘compliant’ and it is not altogether uncommon for an SMSF to comprise a mum, a dad and two adult children. Superannuation legislation however requires that each member be a trustee of the fund.
When introducing this requirement, the government stated: ‘The requirement that all members be trustees will ensure that each member is fully involved and has the opportunity to participate equally in the decision-making processes of the fund (that is, that the fund is truly self-managed).’
Uneven balance of power
Equal participation by trustees however is not a given for every SMSF. It may be anecdotally evidenced, but is often quoted as a widely accepted fact that a four-member SMSF will more than likely have one trustee who tends to dominate decision making.
It is also possible for some SMSFs to use a construct of the trust deed to control the participation of trustees. This can be in the form of a clause inserted into the deed that allocates trustee votes based on member balances. That way a trustee who has, say, a balance of $350,000 can easily outvote another trustee with a balance of $100,000, or even a combination of the other three members/trustees if they have $100,000 each.
The trouble with this set-up however is that it works against the SMSF legislation’s intention, and theoretically renders a section of the superannuation law toothless (that every member must also be a trustee) because a simple clause can remove its application – negating a trustee’s powers and yet leaving them still liable for the duties and responsibilities of being a trustee.
The Tax Office has noted that these types of voting arrangements are in fact used, and that therefore, were it to state that it did not accept them, this would cause considerable problems in respect of existing deeds.
Experts working in the DIY super industry have expressed doubts that such clauses would survive a court challenge. Not only is it accepted that the laws were drafted with an intention to ensure unanimous decision making, but it is also written into sections of the governing legislation, the Superannuation Industry (Supervision) Act 1993 (SIS Act). One section – 52(2)(e) – requires that all trustees ‘not enter into any contract, or do anything else, that would prevent the trustee from, or hinder the trustee in, properly performing or exercising the trustee’s functions and powers’.
Therefore a trust deed that gives weight to votes according to member balances would prevent or hinder some trustees from exercising their powers and being able to properly perform their duties and functions.
If therefore the correct position is that each trustee has equal voting rights, and an equal say in all investment decisions, then mum and dad could find themselves needing the approval and consent of their children concerning decisions about their own retirement savings. Making investments, taking a transition to retirement pension, and taking benefits would be subject to approval by their adult children.
Competing priorities of parents and children
The conventional wisdom that surrounds the topic of investment decisions dictates that these should be contingent on risk profile and proximity to retirement. A person aged 18 would typically be more willing to take on high-risk investments as they have a long time to recoup potential losses. A person in their later years of working life however would be more conservative and defensive about their investment choices.
Even a generous view of the SMSF’s fulfilment of the ‘sole purpose test’ (to take the best actions necessary to save for members’ retirement) will find it difficult to reconcile the two approaches to risk dictated by the make-up of trustees.
Other problems with SMSFs may include:
- trustees must act in the best interests of all members and therefore the parents will need a degree of consensus from the children about the investment and distribution of their retirement savings
- an adult child could feel aggrieved that their own superannuation has not performed as well as it could have were they able to have more control over its investment
- an adult child gets divorced and their former spouse seeks access to some of the super balance (to which they are entitled) which could mean liquidating assets.
Further problems can arise should the parents get a divorce. It could conceivably be the case that, say, mum and two kids vote together to control the fund. Or dad may only need one child to side with his view to have control. Either way, it creates uncertainty for the children.
In other situations, younger members in family SMSFs could complicate matters if they leave the fund to set up their own SMSF to include their spouse and children or if they come to face financial problems. In a case that was brought to the Administrative Appeals Tribunal last year, a couple’s entire retirement savings vanished and their modest SMSF was declared non-complying by the Tax Office when one of its trustees – a drug-addicted son – withdrew more than $40,000 illegally from the fund.
While the case may be an exception to the rule, it is evident that parent SMSF trustees need to be fully aware of the risks as well as the benefits when it comes to child-member trustees.