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Retirement

Adding a child to your SMSF? 5 issues to consider

By Grace Ormsby · September 16 2019
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Retirement

Adding a child to your SMSF? 5 issues to consider

By Grace Ormsby
September 16 2019
Reading:
egg
egg
Parents and teenage children

Adding a child to your SMSF? 5 issues to consider

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By Grace Ormsby · September 16 2019
Reading:
egg
egg
Parents and teenage children

It’s not uncommon to admit a child member into a self-managed super fund, but there are several issues that need to be taken into careful consideration, a lawyer has flagged.

Elizabeth Wang, a solicitor with Townsends Business and Corporate Lawyers, has said the firm is often asked by clients contemplating establishing an SMSF whether they can admit a child member to their SMSF.

She has outlined five issues that need to be taken into consideration before embarking on the creation of an SMSF. To make it easier to understand, all issues are related to the example of a hypothetical couple, Bob and Barbara, who have recently established an SMSF with a corporate trustee and want to add their 17-year-old son as a member.

1. Does the trust deed permit a child to be admitted as a member?

According to Ms Wang, the couple, as SMSF members, “will need to consider whether the current rules of their fund permit a child member to be admitted to the fund”.

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“If Bob and Barbara’s trust deed expressly prohibited the admission of a child member to the fund, then the rules of the fund would need to be amended to permit the admission of Ben as a child member.”

If the rules are silent on the issue, the lawyer said it might be appropriate to amend them to specifically permit admission of a child member, which enables the issue to be put beyond doubt.

2. Does the current investment strategy of the fund need to be revised?

With a child member’s investment strategies “materially different from those of his [or] her parents”, Ms Wang said it would be important to consider whether the current investment strategy should be revised on admission of a child member.

3. Who can or should act as the child’s representative?

Ms Wang reminded nestegg that persons under 18 are legally unable to act as a director of the corporate trustee.

“An authorised signatory such as a parent, guardian or legal personal representative will be required to execute the member admission and appointment of a director documents to act as a member and director on the child member’s behalf,” she explained.

In the example provided by Ms Wang, Barbara has decided to be a representative director on Ben’s behalf until he turns 18.

The lawyer said she would need to be provided with a copy of the current general product disclosure statement of the fund, and will need to sign the application for membership documents on behalf of her son and provide his tax file number to the Australian Tax Office (ATO), if required.

This is where process and formalities can become key: “As Barbara has already been appointed as a director of the corporate trustee in her own right, she is not required to be appointed as a director again.”

However, Ms Wang considered it as important to note “that if Barbara was not already appointed as a director, then her appointment as a director must occur before or at the same time as the admission of Ben as a member of the fund”.

She explained that “if the appointment is made after the admission of Ben, then the fund may not satisfy the definition of ‘self-managed superannuation fund’”.

It is also important to notify the ATO of the change in the fund’s membership, with Ms Wang advising that this can be done by using ATO Form 3036, AUSkey or ATO Digital Certificate.

4. Child contributions

Ms Wang said it’s worth mentioning, for Bob and Barbara, “that contributions made for a child under 18 years old count towards their non-concessional contributions cap”.

According to the lawyer, this means that “if Barbara made a contribution for Ben, then the contribution would count towards Ben’s non-concessional contribution cap and would not count towards Barbara’s contribution cap”.

5. When the child turns 18

Once a child turns 18, they are legally able to act as a director of a corporate trustee in their own right, and anyone acting as a representative director for that child will no longer be required to do so.

Ms Wang cited section 17 (3) of the Superannuation Industry (Supervision) Act 1993 (Cth) (the SIS Act), which provides that a parent or guardian of an underage member may act as trustee of the fund in place of the member while the member is aged under 18.

“An underage member must be appointed as a director of the corporate trustee within six months of their 18th birthday to ensure the trustee structure meets the requirements of the SIS Act and for the fund to meet the definition of a self-managed superannuation fund,” she continued.

Alternatively, the lawyer stated that on turning 18, a young person could appoint their previously acting representative director as their superannuation attorney.

“In this case, Barbara will continue to act as [her son’s] representative director and he need not be appointed as a director.”

If this is the route taken, the young person “would need to execute an enduring power of attorney to adopt this course and it would need to be restricted to superannuation matters”, Ms Wang outlined.

If the former child does not want to be involved in the activities of the corporate trustee, another option highlighted by Ms Wang in the Barbara and Bob example was that the son “could be appointed as a director and then appoint Barbara as his alternate director”.

This would enable Barbara to exercise her son’s powers as a director “in his place until he decided to take up his role personally”.

Adding a child to your SMSF? 5 issues to consider
Parents and teenage children
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About the author

Grace is a journalist on Momentum Media's nestegg. She enjoys being able to provide easy to digest information and practical tips for Australians with regard to their wealth, as well as having a platform on which to engage leading experts and commentators and leverage their insight.

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About the author

Grace is a journalist on Momentum Media's nestegg. She enjoys being able to provide easy to digest information and practical tips for Australians with regard to their wealth, as well as having a platform on which to engage leading experts and commentators and leverage their insight.

Join The Nest Egg community

We Translate Complicated Financial Jargon Into Easy-To-Understand Information For Australians

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