Franking debate: SMSF peak body backs member expansion bill
The head of the SMSF Association has backed a bill that would allow the number of members in a self-managed fund to increase from four to six, saying it will help retirees manage Labor’s plan to axe cash refunds for franking credits.
The head of the SMSF Association has backed a bill that would allow the number of members in a self-managed fund to increase from four to six, saying it will help retirees manage Labor’s plan to axe cash refunds for franking credits.
John Maroney says the proposal to expand the maximum number of members from four to six would allow trustees to increase their fund's taxable income via contributions and earnings on assets in accumulation phase.
This would give members the flexibility to use franking credits to offset tax liabilities instead of receiving them as refunds, Maroney says.
The expansion proposal would result in "more consistent treatment of franking credits with most large superannuation funds", Maroney says, adding that it also highlights one of the inequities of a proposal to withhold franking credit refunds – a key plank of Labor’s election bid.
The SMSF member expansion proposal was first flagged by then Coalition financial services minister Kelly O'Dwyer in April last year and confirmed in the budget a month later.
The reform sought to expand the limit on the maximum number of members in an SMSF from four to six and is due to begin on July 1 this year.
At the time, O'Dwyer said the change would allow for greater flexibility and that, given the growth in the sector, would “ensure SMSFs remain compelling retirement savings vehicles into the future”.
The typical SMSF in Australia comprises two people – the classic “mum and dad” fund, according to 2015-16 Australian Taxation Office data. Less than 10 per cent of SMSFs had chosen to increase their membership beyond two people.
When the budget was released, HLB Mann Judd director and head of SMSF Andrew Yee said this suggested a limited appetite for larger funds among trustees. He said the proposal would largely benefit families who want to use their SMSF to buy a large investment such as property.
However, today he says this dynamic has shifted because of the impact of Labor's proposal to remove cash refunds of excess franking credits, also known as imputation credits.
Yee warns a six-member SMSF account could be an administrative nightmare for accountants and planners.
"Building an investment portfolio that suits every member at different stages of life would be a challenge, let alone reaching a consensus on decision-making, and signing off on the annual account," he says.
He adds that larger SMSFs could run into problems if members get divorced, potentially leading to Family Court action. Trustees, he says, are also wary of allowing additional members in, particularly those who are not directly related.
Anecdotally, Yee says he hasn't been approached by clients to discuss expanding their fund, saying trustees are taking a wait-and-see approach.
"At this stage they're not interested in what ifs," he says. "They want to see what legislation makes it through the parliament before they look at how they can address the loss of imputation credits."
The idea of increasing the number of SMSF trustees, or changing the definition to say, “all members of a family regardless of number”, was first suggested — but not accepted — during the 2009-10 Cooper Review of the superannuation system.
Maroney says the member expansion proposal would add more flexibility and choice to the superannuation system.
“We think this is an important reform that will give families with five and six members the ability to establish an SMSF together or allow the remaining members of a family to join an SMSF, an option now unavailable to larger families," he says.
Maroney urges people to seek specialist advice before making any changes to their SMSF.
“Issues such as elder abuse, complex estate planning disputes and inappropriate investment strategies can occur in SMSFs with up to four members, so the possibility of allowing larger SMSFs could see this happen more often," he says.
“We believe this amendment should be regarded as a non-controversial change to the SMSF sector."
The expansion bill was introduced by the government on 13 February. It has since been referred to a Senate economics legislation committee, due to report back to parliament next Tuesday.
Both houses are due to sit again during budget week – the first week of April, with some casting doubt on its fate.
SuperConcepts general manager of technical services and education Peter Burgess doubts Labor will back the bill.
"I don't believe Labor will be inclined to support to bill, due in part because of its impact on their franking credits policy," he says.
"Therefore, it will require the support on the minor parties, some of whom I believe may support the measure if they are concerned about Labor."
"I expect given the government has introduced the bill, they believe it has a good chance of succeeding before the next election."