Younger entrants into the self managed super fund (SMSF) market continue to grow, with 34.1% of new members under the age of 45 years, the latest ATO statistics show. The main reason for this growth could be the inclusion of adult children as members of family SMSFs.
Bringing adult children into the family SMSF can be a good SMSF strategy to preserve and create family wealth. Some of the benefits are:
- there will be more money within superannuation to invest;
- it may be cheaper to aggregate all superannuation, therefore providing an overall total fee saving; and
- having children as members of a family SMSF may enable parents to teach them about the importance of saving money in super to fund their own retirement.
The only difficulty including children into the family SMSF is that you are limited to having only four members. This could pose a problem for large families because only two children would be allowed with Mum and Dad, comprising a maximum of four members only. This number doesn’t look like it will change any time soon. The Super System (Cooper) Review recommended that the limit of four members shouldn’t be increased and the Government agreed that it is still appropriate.
Family business
Including children as members in a family superannuation fund may be appropriate when a high valuable asset such as the family business premises is held in the fund. The family business premise could remain in the family SMSF through generations, provided of course that there are other assets in the fund to pay retirement and death benefits when necessary. This strategy is often referred to as the ‘intergenerational transfer of assets’.
How does it work?
When business assets are passing from one generation to the next outside of super, the transfer may give rise to capital gains tax (CGT) and stamp duty obligations. By holding the property in a family superannuation fund with the parents and their adult children as members, as the parents cease working and contributing to the fund (subsequently commencing pensions), their children’s ongoing Super Guarantee contributions into the fund result in a change in the respective proportion of account balances , and consequently the ownership of the underlying assets.
Ultimately, the parents’ accounts will be completely eroded by pension payments and the assets of the fund will be represented entirely by the member’s accounts of the next generation. Whilst it’s a slow process, the property will have effectively been transferred from one generation to the next in circumstances which are unlikely to give rise to the imposition of CGT or stamp duty.
When considering whether or not to include children in a family SMSF, it will also be important to ensure that all members have appropriately considered how to deal with the benefits when a member of the SMSF passes away. The importance of estate planning must therefore be considered to ensure that the end wishes of all members are adhered to by the children.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
