With the move to increase the maximum number of members of a self-managed super fund from four to six, there will be more funds with members at different life stages and with different investment objectives. To meet these objectives members may want to hold different assets.
For example, one member may be retired and favours income-producing assets, while a younger member with a smaller balance may want to invest heavily in growth assets.
Graeme Colley, executive manager SMSF technical and private wealth at SuperConcepts, says members can have separate investments within an SMSF but it makes the administration of the fund more complex.
Colley says: “There are a few things to consider. If you do wish to allocate investments among SMSF members, it must be permitted by the fund’s trust deed. The deed should say something along the lines that the trustee, as agreed with the member, may acquire or allocate investments for the member’s benefit, providing it is consistent with the fund’s investment strategy.”
The deed may also say that the investment will be held for the specific benefit of the member and recorded in the member’s account.
“This will allow the investment to be segregated from other fund investments held for other members and those held for general fund purposes,” he says.
Superannuation law allows an SMSF member to direct the fund trustee in exercising their powers under the trust deed. This can include directing the trustee how, when and where benefits are paid, or directing the trustee to acquire and dispose of investments.
Colley says: “Separating assets may keep members happy because they know exactly which assets ‘belong’ to them. But there are a number of issued associated with the allocation of income, expenses and tax.”
The fund can claim a tax deduction for expenses that relate to its taxable income, as well as special deductions unique to superannuation. Any tax credits from income earned by the fund, whether taxable or tax-exempt, can be applied against the tax payable by the fund.
“To be accurate in calculating the net income, a separate income calculation based on the investments allocated to each member’s account may be required,” Colley says.
Adjustments may need to be made to take into account franking credits, permissible deductions and expenses.
Another issue relates to the cash flow of the fund and its ability to pay benefits and expenses when they fall due. Where investments are separate and the fund’s cash flow is not being properly managed, a member’s investment allocation may not be able to make pension payments as required.
“A degree of skill and care is needed here,” Colley says.
He says the fund’s trustees need to be sure there are good reasons to split investments. They need to make sure expenses are allocated on an agreed basis.