There are more than 616,000 SMSFs in Australia controlling more than $930 Billion – so on average each Fund holds more than $1.5M. CoreData research shows that the majority of these Funds have been established for one reason only and that is to enable members of the Fund to control the investment of their superannuation monies. Many have become sick and tired of leaving their retirement dreams in the hands of faceless money managers. Although this is a powerful driver, this single focus often limits that strategic possibilities of the Fund and misses the whole point of these powerful vehicles.
As we will see there are three types of SMSF and the best by far is the Family SMSF which is offered to clients of Abbott and Mourly Lawyers and at LightYear Docs for professionals - www.lyd.com.au
I. What type of SMSF do you have or want?
Having worked in the SMSF industry for over 30 years, I have found that there is a wide range of SMSF clients - those that want to do everything themselves (the DIY'ers), the SMSF’ers and those that are happy to build their Fund into a strong, strategic Family SMSF. Let’s have a look at each of these types of small six member superannuation Funds:
The DIY SuperFund
This is a super Fund where there is a strong hands-n focus by the Trustees of the Fund - the true Bunnings DIY style of Fund. The Trustee generally does the accounts of the Fund using an accounting program such as MYOB. All bank reconciliations, income receipts and expenses are accounted for and the management of the investments are undertaken by the Trustee. Due to the complexity of the superannuation and taxation laws, the Trustee will need an accountant to compile the tax return and must have an independent audit under the SIS Act 1993. As can be imagined, unless the Trustee is only investing in one or two simple property investments, there is a lot of work that must be done by the Trustee – for a Trustee trading shares it is a full-time job.
Of course, once the Fund goes into pension mode with, ideally, the Trustee running a simple but strong SMSF strategy of a retirement accumulation account running alongside for any surplus superannuation benefits the DIY Fund gets left behind. The use of estate planning strategies, multi-generational reversionary pensions and other important but simple SMSF strategies, are a rarity. Not knowing or using common tax strategies can end up costing thousands in the long run.
2. Self Managed Super Fund
This is the next level above the DIY superannuation Fund and one that the majority of SMSFs run. Again the focus is on investments but the Trustees of a SMSF generally have the advantage of tax and superannuation advice from their accountants and financial planners. Strategy in a SMSF may be around pensions, estate planning, maybe some insurance and taxation strategies. The strategic input will depend on the SMSF skills of the advising professional and the willingness of the Trustee to learn and enquire what is possible within their Fund. As we will see shortly some 90% of SMSFs ad this style where there are only one or two members in the Fund - what a waste!
3. The Family SMSF
This SMSF is the same tax structure as a DIY super Fund and a SMSF but the key focus is on the family. Surprisingly, of all the SMSFs in Australia that have the opportunity of bringing up to six members of a family into the Fund, only 10% have chosen to do so. 20% of SMSFs have only one member with 70% having only two members. This is a great loss of opportunity – can anyone imagine what it would be like to establish a family trust with only one or two beneficiaries. No accountant in their right mind would recommend this course of action.
To see the difference between the Family Super Fund and the DIY or SMSF Fund, consider some of the following Family Super Fund strategies, which are among 40 proprietary strategies that we use at Abbott and Mourly Lawyers:
An adult child member in the Fund has an accident and spends six months off work. The Trustees of the Family Super Fund can begin to pay out salary continuance benefits to the incapacitated member to ensure that their salary and wages are kept to a level they were, before the accident.
The retiree members of the Fund use some of their superannuation benefits to Fund a deposit on a property that is acquired with a loan from a bank. However, the younger members of the Fund pay off the loan with on-going salary sacrifice contributions made by their employer. When the property is ultimately sold any capital gain is split between the members relevant to their capital investments.
Mum is the sole remaining parent member of the Fund and has been diagnosed with dementia. The adult child members are in the Fund guiding her superannuation benefits towards the best in health and psychological care for their mother. They have her enduring power of attorney so act as her replacement trustee.
The retiree pension members of the Fund invest in Australian shares with imputation credits. These credits are used by the Trustee of the Fund to reduce any of the Fund's tax liabilities including any contributions tax liability of the younger members of the Fund that salary sacrifice.
In short, Family Super Funds have a very special place in Australia, and for that matter the world. If designed and used properly - they allow the aggregation and investment of a family's superannuation benefits, as well as providing a pool of monies and assets to look after family members including children and grandchildren at the time of an accident, sickness, permanent disability, death, pre-retirement and retirement. To make the most of your SMSF, turn it into a Family SMSF.
II. Let’s look as some important Frequently Asked Questions regarding a Family Super Fund.
Q: I have a SMSF – can this be turned into a Family Super Fund or do I have to get some more documentation or a different trust deed?
Provided you are using a trust deed, which has in-built Family SMSF strategies and options, there is nothing preventing you and your family using your SMSF as a Family SMSF. I have authored a number of trust deeds to ensure they meet the strict guidelines of a Family SMSF. You can get the latest 2024 SMF trust deed from Abbott and Mourly Lawyers and at LightYear Docs for professionals - www.lyd.com.au
Q: I don’t want to bring my children into the Fund and then they take control when I get older.
This is a key benefit of the Family SMSF trust deeds offered by Abbott and Mourly Lawyers. When a child, brother, sister or grandchild becomes a member of the Fund, they must become a Trustee of the Fund or director of the Fund’s corporate Trustee, if the Fund has one. For child members under the age of 18, one of their parents can act as a Trustee or director on their behalf. A corporate Trustee is where a company acts as Trustee of the SMSF rather than individual members. But as a Trustee, each member must be involved in the decision-making process which means each member must be a director – except if the member is a child.
As an aside, the Commissioner of Taxation recommends the use of a company acting as Trustee of a SMSF. Under section 17A of the Superannuation Industry Supervision Act (SISA) this means that each member must be a director. Where there is a child member then the Corporations Act 2001 (CA) will not allow the appointment of a child director. In these circumstances, one of the parents of the child, who is already a director of the SMSF corporate Trustee will act on the child’s behalf.
Under a smart Family SMSF trust deed, each Trustee is given the same number of votes for each $1 sitting in the account balance of the member they represent. This means that, although an adult child may be a member, their voting power when it comes to investments and major decisions of the Fund is limited. For example if they have $10,000 in their superannuation account then that will be 10,000 votes. But if the main member of the Fund has $900,000 then they will have 900,000 votes.
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