Can You Set Up an SMSF With Friends? Pros, Cons and Risks

You can set up a self-managed super fund (SMSF) and share it with friends. However, there are additional considerations when deciding to include friends in your SMSF. Generally, a husband and wife, or partners, is the most common scenario. Now that six members can share an SMSF, friends may decide to pool their cash to defray costs and increase purchasing power.

Considerations when combining your super with friends

Before pooling your super with friends, consider the following:

• Who will make investment decisions and who will control and manage the fund?
• Members and trustees are the same people, or directors if the trustee is a company, except for some minor exceptions.
• A single ATO administrative penalty is imposed on each individual trustee, whilst a single penalty is imposed on a corporate trustee, but the directors are jointly and severally liable. For example, the ATO imposes an administrative penalty of $19,800 on the SMSF trustees. A fund with four individual trustees is fined $19,800 x 4 = $79,200, and a corporate trustee with four directors is fined $19,800.
• Each trustee, or director, is responsible for the operation of the fund, including investment decisions and ensuring the fund complies with taxation laws, superannuation laws, corporations law and general trust law.
• Each member can have a separate investment strategy by segregating the fund’s assets, resulting in additional administration and possibly costs, or the fund can have a pooled investment strategy.
• Changing personal circumstances, such as getting married or getting divorced which can be challenging for the other SMSF members. Also, a member moving overseas may no longer meet the SMSF residency tests, alternatively a member may just not be bothered with an SMSF anymore, may mean the member wants to withdraw from the fund, which may require liquidating assets to enable cash to be paid out or transferred to another complying fund, with capital gains tax and possible Division 296 tax consequences.

What does a segregated fund look like?

Setting up segregated member accounts means each member can choose their own investments, and all income and expenses related to those investments are allocated directly to their member account. The investment is made in the name of the SMSF but is specifically allocated to a member. All direct investment earnings, expenses and contributions are allocated to the member’s account, whilst general administration expenses, such as accounting fees, audit fees and the ATO super levy, are allocated to each member on a reasonable basis. The fund’s bank account can be a general account, but for accounting purposes, it can be sub-accounted to represent each member’s specific cash balance.

Each member has a different investment approach. Paul invests mainly in residential property; Alia invests in the share market; Andrew invests in cash and term deposits; and Kate also invests in cash and term deposits. Assuming the year’s earnings amount to $250,000, a pooled approach allocates the earnings to each member on a reasonable basis, such as the weighted-average balance method. If the assets are segregated, each member reaps the reward or loss specific to the investment choices they made.

Reduction in fund administration fees when sharing an SMSF

Friends getting together to set up an SMSF can significantly reduce administration costs.

For example, we charge a fixed fee package based on a fund’s complexity, not the number of members. A fund with 4 members that invests only in the share market, local and international shares, ETFs, cash, term deposits and/or managed funds costs $1,300+GST for our annual administration services including the independent audit costs.

Annual Administration fees	Annual Costs	Cost per member
Accounting/Audit	$1,430	$357.50
ASIC	$70	$17.50
ATO levy	$259	$64.75
Total costs	$1,759	$439.75

When can’t a friend share your SMSF?

Friends may not be able to act as a trustee, or director of a corporate trustee, where they have been:

• convicted of an offence involving dishonesty, such as fraud, theft, perjury, bribery or corruption
• subject to a civil penalty under the superannuation laws and regulations – very rare, as it is a last-resort penalty for severe contraventions, such as lending to a relative, holding in-house assets, breaching the sole purpose test, breaching the borrowing prohibition and the arm’s length rules
• considered as being insolvent under administration
• made bankrupt and have not been discharged
• disqualified by the ATO or APRA

Under SMSF rules, a friend cannot be an employee of another member unless they are a relative. However, there are limited exceptions that allow unrelated members who run a business together as co-directors, and their wives, to set up an SMSF together.

What are the pros of sharing an SMSF with friends?

The pros of sharing with friends include:

• Cost efficiency with lower fees for administrative costs
• Having a special-purpose corporate trustee limits administration and costs if a member decides to leave the fund
• Member investment choice using segregation of assets for each member, allowing personalised investment strategies
• Increase in purchasing power and possible access to other markets for sophisticated or wholesale investors
• Well-chosen friends may have shared investment objectives and risk tolerances
• Pooling resources can enable investments in assets like property

What are the cons of sharing an SMSF with friends?

The cons of sharing with friends include:

• Greater risk of conflict between friends
• As each member is equally responsible for decision-making and any penalties that may arise, it is important that all members understand how the fund operates and their responsibilities
• Liquidity issues may arise when a member wants to leave the fund, especially if the fund has chunky assets such as property
• Segregation of assets can be more costly due to additional administration
• A member may illegally access the fund’s bank account or make fraudulent investments
• A member may breach the super laws, but all members are equally responsible anyhow