October 2013 Newsletter 

In this edition:

Welcome

Why keep a Motor Vehicle Log Book?

Key changes to Workers Compensation 2013-2014

Multiple generations in one SMSF - a great idea or a disaster waiting to happen?

Warning: ATO-related scams

Most SMSFs have just one or two members (typically a couple). However, the law allows up to 4 members and for many families the question arises – should children and parents sometimes belong to the same fund?

There are pros and cons and the right answer will depend on your circumstances.

It is also worth bearing in mind that sharing a fund with another generation could take many forms. At one extreme the family might genuinely pool their superannuation resources – the SMSF then becomes a family investment vehicle. At the other extreme, there might be only one generation with their entire superannuation balances in the fund while other members (of an older or younger generation) might just have a token amount to give them a "presence" in the fund.

What reasons do people often have for inviting another generation into their fund?
Parents often cite cost savings for their children (compared to expensive "public" superannuation) and the ability to ensure that their young adult children take their superannuation seriously as reasons to share a self managed superannuation fund.

At the opposite end of the spectrum, it is becoming increasingly common for adult children to manage the financial affairs of their elderly parents. Currently, the very elderly often do not have self managed superannuation funds but that is likely to change over the next 20 years given the popularity of SMSFs amongst today's recent retirees. In the future, then, you may find yourself managing not only your own SMSF but also your parents'. Particularly after one parent dies, it may make sense to cut down the administrative burden this entails by combining into one fund.

These are all reasons it may make sense to combine several generations in one fund at a particular point in time or for a particular period of life. There are, however, other factors that will sometimes encourage joining forces on a more long term basis.

A bigger pot to invest
Some investments (eg property) require scale to invest effectively. Combining several family members in one fund simply increases the total investment pool. It may give everyone better diversification, the ability to have a part share in large investments that would be impossible individually, the ability to reach minimum thresholds for investments that have them etc. 

At a practical level, this is particularly relevant where a family runs a business together and wishes to buy the business premises in super. Even if the fund borrows to buy the property, the loan will clearly be repaid more quickly (and in fact the borrowing power of the fund will be greater) if there are four members' contributions being used to pay off the loan rather than only two.

Eventually, even if you always draw the lowest possible amount you can from your pension, the fund's assets will eventually need to be sold to make the required payments (1). If you have children who are making contributions to super (or have employers doing so on their behalf), one benefit of combining is that their cash flow can finance your pension. This does not mean they are losing their own super – on the contrary, their cash is effectively being used to buy a share of some of your fund's existing assets. Because this is all happening within the fund (rather than by actually selling / buying assets), none of the usual costs associated with buying and selling assets such as tax, brokerage etc come into play.

Leaving key assets in super
If your fund has a key asset such as a property, it will often be in the family's interests to leave it in the most favourable tax environment (your super fund) as long as possible. Unfortunately, when both members of a couple have died, it is generally compulsory to pay whatever remains of their superannuation as a lump sum to their beneficiaries or their estate. This will effectively force the family to either sell the property or at least transfer it out of super.

In contrast, if the children have made contributions over many years and these have been used to buy new assets (eg shares), it may be possible to use these other assets to pay some or all of any benefits due when you die. This may well enable the family to leave part or all of the property in super well beyond one generation.

That same logic can apply to any asset where there is some value in leaving it in the fund. For example, some funds invested in special trusts or companies before August 1999 which effectively gave them far more investment flexibility than we have today (2). If the children are able to use their contributions to take over these units or shares over time, they can effectively inherit that structure and all the flexibility that goes with it.

Special tax deductions when a member dies
Potentially there are some tax deductions available to superannuation funds when a member dies. Unfortunately, the ATO doesn't give your fund a tax refund if you claim these deductions, it just allows the fund to use them to reduce the fund's tax in the future. Additional members (particularly members receiving contributions) can be a useful source of taxable income (3).

Why do most people not do it?
Despite all these points, the most common structure is still just one or two members (of the same generation) in a self managed superannuation fund.

There are three quite powerful reasons that drive that decision.

Control
As soon as your fund is shared with your children (or your parents), you are giving up some control over your own financial affairs. Of course, the same is true if you share your fund with any person, including a spouse, but this is generally less problematic if your financial goals are the same. That's often not the case when different generations are involved.

Some examples of the control challenges presented by a multi-generational SMSF are:

• Superannuation funds are trusts. The decisions are made by the trustees (who might be you and your children individually or a company of which you are all directors). Imagine your fund had a company as the trustee and you and your spouse were directors alongside your two children. If your spouse died, the "board" would be dominated by your children. While you would all have certain legal obligations to treat all members fairly and protect their interests, the fact would remain that in the normal course of events they could outvote you.
• Once you die, that position is made even riskier if you have other children who are not members of the fund. Effectively the siblings who do belong have far greater power over how your super is dealt with than those who do not.
• If one of your children gets divorced, the court can order that his or her superannuation is split with the ex-spouse. While the spouse can't take more than he or she is owed, it may mean that the fund has to sell assets unexpectedly.

There are many mechanisms that can be put in place to mitigate some of these risks. For example, superannuation funds can adopt rules that try to keep control in the hands of whoever has the largest balances at the time. Equally, your fund can allow you to make binding instructions on your death (a little like a will) that forces the trustees to pay your death benefit exactly as you have instructed. However, no method is perfect and you certainly face additional risks if your children belong to your fund.

Different directions
Some families have good reason for sharing investments – for example, those in business together may well have a shared interest in buying the business premises. Others, however, may find they wish to head in completely different directions which starts to undermine the usefulness of being in the same SMSF.

For example, you may find that your appetite for seeing the value of your fund going up and down with the sharemarket reduces over time, particularly if you are drawing down your capital to live on. Your children, however, may take quite a different view if they are many years away from being allowed to draw on their super. While you can certainly run your investments separately within the same fund, doing so can come with additional (administration) costs, and may well start to undermine the very reasons you joined forces in the first place.

Longevity of the arrangement
What works for your family now may not work in the long term for a variety of reasons. The prompt for a change may be as simple as one of your children getting married and wishing to establish a fund with his or her spouse.

Unwinding a shared arrangement after it has served its purpose can be fraught as it may well trigger capital gains tax and stamp duty on the sale or transfer of assets. Achieving equity between the members leaving the fund and those remaining can be challenging even on quite simple things like unrealised capital gains and losses. Of course it can all be done but each new issue to be resolved leads to an opportunity for argument and ill-feeling.

So is it 'horses for courses' or not?
Our starting point with clients is still to treat most SMSFs as a single generation vehicle (with children being added after the death of both parents in order to use tax deductions etc if applicable). However, there are certainly a number of circumstances where combining the generations sooner rather than later makes sense.

Should you have any questions in relation to having your children join your Self Managed Super Fund, please do not hesitate to contact your Goodwin Chivas & Co advisor on 02 9899 3044.

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_(1) There are some steps you can take to avoid this by taking amounts that are called "commutations" and transferring super fund assets to your own name rather than selling them to pay the pensions in cash. However, the net effect is the same – some of the fund's assets ultimately end up leaving the fund in order to meet the payment requirements for pensions
.(2) It's never this simple but to illustrate : these trusts and companies can do things an SMSF trustee would never dream of doing – leasing to, investing in and lending to related parties with very few restrictions. There are still some caveats. For example, the arrangements need to be on an arms length basis. Nonetheless, the structure is invaluable where excellent investment opportunities arise and the SMSF is not ordinarily allowed to take advantage of them
.(3) Of course, this could also be achieved by having the children join after their parents have died.