What to consider before you add members to an SMSF

By William Truong, Technical Services Manager

Self Managed Superannuation Funds ('SMSF') are a great way for clients’ to have control over their super and it can appear beneficial to add more members for a multitude of reasons, like sharing decision making and group investment power. Whilst this can be true, more members can mean additional complexity.

With the passage of recent legislation1, the maximum number of members in new and existing SMSFs and small APRA funds has changed from a maximum of four to a maximum of six. The legislation received Royal Assent on 22 June 2021, with application from 1 July 2021.

Understanding the legal requirements

The laws surrounding and protecting Australia’s super regime can be complex, including tax and trustee requirements. While these new rules may benefit your clients who wish to add additional members to their SMSF, advisers and trustees must understand the impact of the increase in members on decision-making and fund administration.

Superannuation law

Under superannuation law, the definition of an SMSF2 has been amended to allow up to six members of SMSF or small APRA fund.

Other existing rules continue to apply, which new members must understand and adhere to:

  • All members must be a trustee / director of the corporate trustee (unless an exception applies)
  • No member can be an employee of another member unless the members concerned are related
  • No trustee / director of the corporate trustee can be remunerated from the fund or any other person for any “trustee” duties or services performed.

Taxation law

The definition of a Small superannuation fund3 in Taxation Law has been amended to allow the new six member rules to be implemented.

Several other parts of the taxation law will also be amended to reference this new definition, including:

  • an update to the definition of 'disregarded small fund assets'4 relating to segregating assets within an SMSF and using proportional basis for tax purposes
  • the requirement, in certain circumstances, to include a share of the outstanding limited recourse borrowing arrangement (LRBA) balance in an individual’s total superannuation balance5, which can impact certain things such as ability to make non-concessional contributions, make catchup concessional contributions, spouse tax offsets
  • the transfer balance credit that will arise when a repayment is made under certain LRBA  (for example, when a repayment on an LRBA6 loan supporting a retirement phase pension is made from an asset that supports accumulation / pre-retirement Transition to retirement income stream accounts).

Trust law

The Trustee Acts of some states (eg NSW, Qld, Vic, WA and ACT) still only allows a maximum of four individual trustees for SMSF and small APRA funds.

For those who want to take advantage of the increased membership will need to have a corporate trustee (rather than individual trustees).

Advantages of adding new members

Increasing the membership of an SMSF or small APRA fund can provide certain advantages.

The extra two member allowance can benefit larger families who wish to include more or all of their family members in a single SMSF, rather than having multiple SMSFs. This can create cost efficiencies of running a single fund over multiple funds or using other super fund such as retail super funds. There are also potential cost savings in the administration of the fund, depending on the size of investments and other administrative factors.

An SMSF or small APRA fund with more members can allow more purchasing power and investment diversification. In some situations, if the family is involved in a small business, it is possible to have a business property in the fund which can use superannuation savings more effectively by leasing the property back to the family business.

Longer term, if children continue a family business, they may retain the property in the fund as part of an intergenerational transfer of assets which can be more tax-effective for the SMSF or small APRA fund.  An additional benefit of holding assets in a superannuation fund is that it can provide protection from creditors in the event of a business or member bankruptcy.

More members in SMSF or small APRA fund can:

  • add increased ability for the SMSF to qualify as an ‘Australian superannuation fund’ when one or more members travel overseas for a prolonged period (ie meeting the ‘active member’ 50% test), hence retaining the fund’s complying status,
  • help with liquidity (eg meeting minimum pension requirements and financing borrowing arrangements via LRBAs)
  • for funds that hold reserves, reducing the time needed to reduce the reserve balance (ie allocate it to member accounts) without exceeding the members’ concessional contributions caps.

Possible disadvantages of adding additional new members

Whilst there are some key beneficial advantages to adding more members to SMSF or small APRA funds, there can be disadvantages too.

While a trustee must consider the best interests of all beneficiaries when making a decision, these can become more complex, when there are more beneficiaries to consider. For example, differing aged members may have differing financial requirements or goals from their SMSF or small APRA fund or create a larger range of risk profiles. As we know, different risk appetites can lead to complex investment strategies, which could need to change over time. This again, can lead to greater management complexity and administrative issues.

Should an event occur that the ATO imposes administration penalties, these will apply to each of the individual trustees. For a six member SMSF, this can result in penalties of up to six times that of a corporate trustee, causing a much greater financial impact for members as a group.

The superannuation legislation requires each member to be a trustee or director; however, it does not stipulate the voting rights of those trustees or how a casting vote operates. While it is usual that each trustee has one vote, it is possible to have voting rights based on each member’s balance in the event of a deadlock. This could lead to existing trustees or director/s being 'out-voted' in the running of the fund, so need to develop a workable dispute resolution mechanism in the fund set up and have it documented in the trustee deed/or constitution of the corporate trustee. Key items to consider:

  • Who is going to be making decisions?
  • How could members ensure the right people are making decisions at the right time?
  • What happens if one member loses mental capacity?
  • What happens if there is a falling out between members? Can the remaining members force the problematic member to leave?

As a rule, we know that more members mean the possibility of more problems and more issues to be considered regarding paying out death benefits. For example, if a client is worried about decisions being made by a majority where a surviving spouse could be outvoted in a death benefit payment decision process, plans for locking in a death benefit by way of a valid binding death benefit nomination or a reversionary income stream becomes valid to consider upon the commencement of an SMSF.


While there can certainly be benefits of having extra members in an SMSF, six-member SMSF funds could also be a recipe for disaster if not managed correctly. Longer term considerations are required to ensure all members understand the potential benefits and risks, so appropriate measures can be put into place for smooth running of an SMSF and member’s peace of mind.

1 Treasury Laws Amendment (Self Managed Superannuation Funds) Bill 2020
2 SISA 1993 s.17A(1)
3 ITAA 1997 s.995-1(1)
4 ITAA 1997 s.295-387
5 ITAA 1997 s.307-2316
6 ITAA 1997 s.294-55

More information

If you have any questions, or would like more information, please contact the IOOF TechConnect team on 1300 650 414.

The information in this section of the website is intended for financial advisers only and is not to be distributed to clients. It has been prepared on behalf of Australian Executor Trustees Limited ABN 84 007 869 794 AFSL 240023, IOOF Investment Management Limited ABN 53 006 695 021 AFSL 230524, IOOF Investment Services Ltd ABN 80 007 350 405, AFSL 230703 and IOOF Ltd ABN 21 087 649 625 AFSL 230522 based on information that is believed to be accurate and reliable at the time of publication.