What are the membership rules for setting up a self-managed super fund?
There are certain restrictions that should be observed when setting up a self-managed super fund. As a general rule, anybody in gainful employment can consider setting up a self-managed super fund to consolidate on their retirement savings. Baby boomers generally fall into this category, as they have significantly more wealth and are able to make larger contributions. Moreover, they have a vested interest in their ultimate retirement. The younger generation learning from their parents’ experience, have also shown a growing interest in setting up self-managed super fund as a vehicle for wealth accumulation.
Single member setting up a self-managed super fund
When setting up a self-managed super fund, the Superannuation Industry Supervision Act (SISA) must be considered in conjunction with general trust laws. Under general trust laws, it is not possible for a member to be a trustee for himself/herself. There must be a separation of equitable ownership and legal ownership. This problem was resolved with the insertion of section 17A into the SISA. Section 17A introduced an exception to the rule which stipulates that a single member fund must:
Be a sole director/shareholder company and act as an corporate trustee, with the member as the sole director and shareholder (this creates the necessary separation of equitable ownership and legal ownership).
A ‘relative’ is widely defined and can include second cousins, relatives by marriage or adoption, de facto spouses, and ex spouses.
Limitation on number of members setting up a self-managed super fund
The number of members is limited to four, or less, when setting up a self-managed super fund. This ensures members maintain direct control and information is made readily available. Under a retail or industry fund, the large number of members and complexity of the administration back office means that members only receive quarterly, bi-annual or in some cases, annual reports.
The reporting system with self managed super funds is streamlined, and much of the consumer protection laws are made redundant. In most cases, the members and trustees are one and the same, they are basically reporting to themselves. They will have automatic information to financial information which facilitates quicker decision making for investment purposes. This results in lower compliance and SMSF administration costs. SMSF with greater than 4 members would become more cumbersome and contradict the government’s policy of allowing members to manage their own superannuation.
Members who are also employees
When trustees / members pass away
The importance of appointing a legal personal representative cannot be understated. They fulfil the role of the trustee or the director of the corporate trustee, in the uneventful death of a member of the fund. The legal personal representative will assume the role of trustee from the date of death of a member, until the commencement of the payment of death benefits. Once the commencement of the death benefits is being paid, the legal personal representative must cease to be a trustee or a director of a corporate trustee.
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