Can I add my kids to my SMSF?

In 2021, new legislation permitted SMSFs to have up to six members, leading to increased interest in adding adult children.

Do you really want your children in your SMSF?

There are many good reasons to add in your children as members but like anything else there are also good reasons not to.

What are the pros?

Pooling members super can enable the fund to build wealth and diversify the fund’s investment portfolio.

• Investing in commercial real estate – Pooling super from the members with their adult children and partners can be substantial and allow the fund to purchase the family business premises without borrowing or minimise the borrowings required to acquire the property.
• Cost savings – potential savings in administration costs as accounting, audit and administration fees do not change when introducing more members and the costs per member will therefore be reduced.
• Cashflow requirements – contributions and rollovers flowing from the additional members can be used to pay pension payments for the older parents or meet repayments on limited recourse borrowing arrangements (LRBA) or possibly pay out the balance of the LRBA.
• Educate younger family members as they get involved in the financial decisions for the fund.

What are the cons?

Adding in children does have additional risks and should be carefully considered before proceeding.

• As a trustee or director of the trustee, each member has equal control, so your adult children could have much smaller super balances than you but still hold the same decision-making power.
• The risk profiles of members can vary considerably, with younger members typically demonstrating a greater risk appetite as they accumulate their superannuation, in contrast to parents who may be in pension phase and prefer a more conservative approach. While these differing needs can be addressed through asset segregation and tailored investment strategies, such measures may increase the fund’s overall complexity.
• Dispute resolution can be complex. For example, a structure with two older parents and two adult children with their spouses involve three different family groups, which can make resolving disagreements or misunderstandings more challenging.
• Adult children will have direct access to the fund’s bank accounts and investments resulting in higher risk of wrongdoing.
• Some adults prefer confidentiality of member balances and do not want to share the knowledge of how much super they have to their children. This is not possible with a shared SMSF as all trustees must sign the financials each year.

How is a member added?

• The member makes an application to the trustees in accordance with the fund’s governing rules which includes a statement that they will act as a trustee of the fund or a director of the trustee.
• It is best practice to provide a product disclosure statement (PDS) to the member but for SMSF members it is not required provided the member has sufficient information to decide.
• The trustee needs to consider and minute the acceptance to add the member– they must ensure the member is not a non-resident of Australia and is an eligible person to be a member and not be under a legal disability.
• The member must sign a consent form declaring they have not been or are not currently:
  • convicted of a dishonest offence
  • a bankrupt
  • convicted of a civil penalty order under the Superannuation Industry (Supervision) Act 1993 (SIS)
  • disqualified as a trustee or acting as a director under SIS.
• The member must be appointed as an individual trustee or a director of the corporate trustee unless they are under a legal disability i.e. under 18 – a parent can act as the legal guardian for a child until they turn 18.
• When appointed as trustee they have 21 days to sign and witness a ATO Trustee Declaration Form.
• The member obtains an electronic service address (ESA) which is required to make and receive rollovers from other superannuation funds and enable third party employers to make contributions to their SMSF. The ESA we use is “smsfdataflow”.
• Notify the Australian Taxation Office (ATO) of the new member’s details, including if they are an individual trustee or a director of a corporate trustee, within 28 days which can be done via:
  • online through the Australian Business Register
  • through us as a registered agent
  • by phone on 13 10 20
  • using a paper form “Change of details for superannuation entities”.
• The trustee provides a letter of confirmation to the member.

How is a member removed?

Removing a member must be done in accordance with the fund’s governing rules but apart from complex situations the following steps act as a guide:

• A member requests their benefits to be transferred or rolled over to another complying superannuation fund or if they are eligible their super balance can be paid to them.
• The trustee must consider and approve the request which should be formally recognised in a trustee minute or resolution.
• The member resigns as trustee or the director of the corporate trustee.
• Depending on the trust deed a member may automatically be removed if they no longer have a super balance.
• Many trust deeds automatically remove a trustee if they are no longer a member.
• Review the fund’s trust deed to find out how to remove a deceased member.
• Notify the Australian Taxation Office (ATO) of the change to member’s details, including their resignation as an individual trustee or a director of a corporate trustee, within 28 days.

Difficulties may be encountered when family members are feuding or there is a divorce or disputes about payment of death benefits.

How are assets split between members?

Assets are pooled, with income and expenses allocated fairly among members. While SIS does not mandate a specific method, a fund’s trust deed may outline an allocation formula. Allocating net income using the daily weighted average balance is a common and well recognised approach. Certain items, such as contributions, pension payments, life insurance premiums, and related taxes, must be directly allocated to individual member balances. Trust deeds often permit either asset segregation for specific members or pooling between groups; income and expenses from segregated assets go directly to the relevant member, though this approach usually incurs higher administrative costs than pooled assets. At the end of each financial year, members are provided with their individual member statements detailing their balances and the split.