What are the rules for children under 18 joining an SMSF?
Any individual may become a member of an SMSF, subject to the eligibility requirements set out in the fund’s governing rules and trust deed. Additionally, members must meet the criteria to be appointed either as an individual trustee or as a director of the corporate trustee. In cases where a member is deemed ineligible, another qualified individual may be appointed to act as director or trustee in their place. An exception to this rule is a “disqualified person” who is unable to act as a director/trustee, and a qualified individual is prohibited from stepping into their role.
Hint –The governing rules of an SMSF can allow a member with a $nil balance. A member with a $nil balance generally has equal control and decision making with other members. It is crucial to assess this carefully as a member with a $nil balance could potentially control the fund.
Who is a disqualified person?
A disqualified person includes a person who:
- has been convicted of a dishonest offence such as theft and fraud
- contravened the SIS rules resulting in a civil penalty which are serious breaches such as providing a loan to members and breaching the sole purpose test
- is an undischarged bankrupt
- has been disqualified by the ATO
A company is prohibited from being a trustee if the executive officer or secretary is a disqualified person or the company is in receivership, liquidation or being wound up.
Who is a qualified person?
- must be at least 18 years old
- cannot be a disqualified person
- cannot be incapable of acting such as a minor under a legal disability
Is my child under 18 eligible to be a trustee/director of my SMSF?
A child under the age of 18 is legally unable to be appointed as an individual SMSF trustee or a director of an SMSF corporate trustee. A minor is under a legal disability. The Corporations Act 2001 specifically states “only an individual who is at least 18 may be appointed as a director of a company”. Trustee legislation specific to each state and territory prohibit a minor who is defined as being under the age of eighteen years from acting as a trustee.
Is my child under 18 eligible to be a member of my SMSF?
Yes, they may become a member, subject to the fund’s governing rules. Under the general SIS rules a member must meet the eligibility requirements to act either as an individual trustee or as a director of a corporate trustee. There is an exception for a child under 18.
Can I act on behalf of my child?
Yes, you can. An exception under the SIS rules allows a parent or guardian to act as an individual trustee or director of a corporate SMSF trustee on behalf of a child under the age of eighteen.
A parent can act for a minor regardless of the parent being a member of the SMSF or not.
What are the benefits of adding a child to my SMSF?
Using an SMSF provides a low-risk environment to build family wealth.
Including a child in an SMSF helps them gain financial literacy by participating in financial markets and learning about risk and return.
Liquidity challenges may be mitigated when younger members make cash contributions, particularly in scenarios where older members have allocated funds to real estate investments and the fund need cash to provide pension payments, lump sum disbursements, or death benefits.
With more members, the super pool grows, providing access to a wider range of investment options such as business premises, residential properties, private equity funds, sophisticated investments, or wholesale offerings.
What is the Downside of adding a child to my SMSF?
All trustees/directors have equal control which may mean children (over 18) with very small balances have equal say in relation to major investment decisions or other strategies.
Disputes may occur when an adult child wishes to rollover their super balance, but difficulties arise due to lumpy assets that are hard to liquidate, causing family tension.
Asset segregation can be considered to allow for tailored investment strategies when members’ short-term and long-term retirement objectives do not align but the strategy incurs administrative complexity and extra costs.
Control of the SMSF is a crucial consideration. Adding in children who then marry, have children and possibly divorce may involve the fund in protracted family law matters.
How to maintain control of an SMSF?
Typically, a majority of shareholders hold the key to appointing and resigning the directors of a corporate trustee. However, the ultimate power to hire and fire a trustee is provided by specific clauses in the fund’s trust deed.
Consider admitting the children as conditional members which may mean specific circumstances such as a member divorcing, fraudulently using fund assets or estrangement with children may trigger an automatic rollover of their superannuation balances to another fund.
Appointment of an attorney under an Enduring Power of Attorney (EPOA) may be appropriate to carry out the wishes of a member who loses capacity due to mental health issues or becomes physically incapacitated and unable or unwilling to carry out their duties as a trustee/director.
Proper estate planning ensures trustees follow the deceased’s wishes. Trustee control is essential, as disputes often arise over binding death benefit nominations and trustee appointments, especially in blended families.
This is a very complex area, and advice should be obtained from superannuation specialist to ensure compliance with legal and superannuation requirements.