Increasing SMSF member cap could help funds use franking credits

Nest egg, superannuaiton, SMSF, retirement
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The SMSF Association says the proposal to increase the SMSF member cap from four to six could allow SMSFs to use more franking credits under Labor’s change, and help fund enter into purchases of large assets.

In last year’s Budget the Government announced a proposal to increase the maximum number of members from four to six. Legislation including the change was introduced in February, and is subject to a Senate inquiry.

The SMSF Association (SMSFA), in a submission to the inquiry, is supportive of the measure.

The Association says that adding more members to an SMSF could increase its taxable income, providing “extra flexibility” to use franking credits. This would become more relevant if Labor is elected and implements its policy of stopping refunds of excess franking credits.

“This would result in more consistent treatment with most large superannuation funds. However, this outcome highlights one of the inequities of any proposal to deny franking credit refunds,” says the SMSFA, in its submission.

The SMSFA also says that increasing the member cap could allow SMSFs to fund larger asset purchases, such as business property, the capacity for which has been reduced by lower contribution caps.

“Pooling monies allows small business owners the opportunity to transfer their most significant business asset to their SMSF which increases their ability to save for retirement. This is particularly important for small business operators who do not have the ability to contribute as easily as other individuals as they tend to reinvest in their business rather than contribute to superannuation.”

“Allowing small business owners to pool their balances together will be an added benefit of the increase in SMSF members. With the recent pull back in limited recourse borrowing arrangement offerings by large banks and a potential ban by the Australian Labor Party, this potentially becomes even more important.”

Labor’s policy is to stop new LRBAs – following a recommendation of the Financial System Inquiry to return to a ban on most forms of borrowing in superannuation.

In terms of negatives of increasing the SMSF member cap, the SMSFA notes that larger SMSFs could lead to elder abuse.

“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. Accordingly, larger SMSFs should only be used in limited situations and with specialist SMSF advice,” said SMSFA CEO John Maroney.

The SMSFA warns that: “ANY decision to add extra members to an SMSF should always be properly planned and accompanied by specialist SMSF advice to reduce any potential risks.”

“We believe this amendment should be regarded as a non-controversial change to the SMSF sector which promotes more choice and flexibility in the superannuation system and does not pose any significant integrity issues, especially if specialist SMSF advice is sought by consumers.”

The Senate inquiry into the Bill is due to report by 26 March. Parliament is next scheduled to sit on April 2, with only a few sitting days likely ahead of the expected calling of a May election.

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