SELF-MANAGED SUPER FUND GUIDE 2017
No more than four members
Single member funds
Members who are also employees
Chapter 2 - Who's who in a SMSF?
People who use an SMSF to manage their super are known as members of that fund.
A person is a member of a fund if the trustee of the fund holds benefits on trust for them. The role is analogous to a beneficiary of a family trust, and a unit holder of a unit trust. The member is entitled to receive benefits from the SMSF on the occurrence of certain specified events, such as reaching a certain age, or dying (in which case the benefits are paid to the member’s estate or dependants or a nominated person).
Most SMSFs only have two members. Often, these members are a couple, leading to the colloquial term ‘mum and dad’ funds. A minority will have members of another generation (i.e. children) as members too. It generally does not make sense for unrelated people to be members of the same SMSF. More commonly, two or more unrelated people will establish separate funds so as to keep their financial arrangements separate.
The most obvious distinction of a self managed superannuation fund, is that each member of the fund must also be a trustee of that fund. There are two ways to be a trustee: in one’s own name, or as a director of a company where that company is the trustee of the fund. But in order to be a self managed superannuation fund, a member must have a managerial responsibility for the fund assets.
NO MORE THAN FOUR MEMBERS
An SMSF can have no more than four members. The number of members is limited to four so that the SMSF cannot become too big. This rationale is not perfect, as obviously it is possible for a one member fund to hold more member benefits than a four member fund. But it does make some sense. It also means that individual SMSFs do not become too big, and that the members stay in control.
Many of the consumer protection type rules in the law do not apply to SMSFs. The rule that members must be trustees means that members will automatically have access to financial information and other information about the fund, and so a further layer of protective regulation is not necessary. This simplifies the costs of running SMSFs and makes them more accessible and workable. Increasing the number of members beyond four members would run contrary to this policy, making SMSF less workable, more expensive and more difficult to run.
There is some sense in the rule being relaxed so there can be more than four members if they are all part of the same family. This “same surname” approach is discussed in the industry from time to time but there is nothing to suggest it will become law at present.
SINGLE MEMBER FUNDS
Under trust law, it is not possible for a person to be the trustee for himself or herself. This is because the separation of beneficial ownership and legal ownership of trust property is an essential aspect of a trust. If the same person holds both beneficial and legal ownership of a piece of property, then there is no trust.
This posed a problem for the legislature when the rules for self managed superannuation funds were being drafted: how can the ‘all members must be trustees’ rule be satisfied in the case of a single member fund? Two solutions were established:
a sole director/shareholder company can act as trustee, with the member as the sole director and shareholders (since this creates the necessary separation of beneficial ownership and legal ownership); or
another person can be a trustee – provided that other person is a relative.
A “relative” is defined widely and goes as far as second cousins, and includes relatives by marriage or adoption, de-facto spouses, and ex-spouses. “Spouse” includes a same sex partner.
MEMBERS WHO ARE ALSO EMPLOYEES
A person cannot be a member of the same fund as his or her employer, unless they are related. This rule is intended to make sure that self-managed super funds do not become de-facto employer-sponsored funds, but without the extensive consumer protection type rules afforded to employees in these funds.
An auditor is a finance professional who checks that self managed super fund is being run in accordance with all relevant rules. These rules include both the trust deed for the individual SMSF as well as the general superannuation law.
In order to comply with the law, and therefore gain access to the various tax concessions available to an SMSF, an SMSF must engage a registered auditor who is independent of the fund. The Australian Tax Office have provided the following simple video to explain the role of an SMSF auditor:
In order for an auditor to be able to perform their role, various administrative tasks need to be completed for an SMSF. These tasks can be completed by a member, but more commonly the fund will engage some form of professional administration to do this for them in an efficient and compliant way. Engaging a professional administrator typically means that the administration is performed more effectively, and in particular that the annual audit can be completed in a more efficient and therefore less expensive way.