Why inviting your kids into SMSF is a bad idea

While family members in accumulation mode could help soften the impact of Labor’s franking credit plan, don’t make it your first option.

Note: This article by Tim Mackay was originally published in the Australian Financial Review. You can view it on the AFR website [here] ($paywall).


With much having been written and speculated about Labor’s proposed reform to stop cash refunds for dividend imputation credits, you are probably asking “what should I do?”.

Rather than delving into the rights or wrongs of the policy, let’s separate hype from reality to best position your self-managed superannuation fund (SMSF).

For Labor to implement its reform, it must clear a number of important hurdles. First it needs to win the federal election. If I were a betting man (and I’m not), I’d concede this looks more likely than not. If Labor loses the election, then its reform is dead in the water and this is all moot.

Assuming Labor wins a May 2019 election, it will need to implement legislation quickly before the proposed July 1, 2019 start date. That’s a narrow window to draft, circulate and pass important legislation, especially without causing unintended consequences. Labor is unlikely to back down on this reform but the devil will be in the detail of its final legislation.

Labor will need to pass the legislation through both houses of parliament – it may control the lower house, but will it control the Senate? Labor will claim a mandate for this reform but senators may also claim their own opposing mandate. It could be similar to the Abbott government’s May 2014 budget, when it struggled to pass controversial reforms through a hostile senate.

So do we just sit around waiting for the next election? Well, yes and no.

If you haven’t already done so, you should immediately quantify the likely impact on your SMSF. The easiest way is to average your ATO refund cheque over the past few years. Then determine if you can absorb the loss in your family budget.

One potential solution often floated is to add members to your SMSF. Some believe there’s an army of large families out there queueing up to join SMSFs – this at the same time that ATO statistics tell us that four-member funds have fallen in relative number while three-member funds have gone nowhere over the past five years.

Regardless, having up to six members in your SMSF could be a workaround to Labor’s franking credit refund reform. Family members in accumulation phase can soak up the excess franking credits.

Inheritance impatience

In theory, this sounds great – your family retains excess franking credits rather than forfeiting them to the ATO.

In most cases I can’t think of anything worse. In doing so, you almost guarantee inheritance impatience.

Imagine the conversation with your kids (and their spouses and anyone else whispering in their ear) when they join your SMSF.

“Wow! You’ve got how much saved in ‘our’ SMSF? Oh, you’re building wealth for the family to eventually inherit. That’s great. But we’re struggling right now with a mortgage and school fees. Why do we have to wait until we’re old to get what you’re going to give us anyway?”

In truth, most families are messy. Like any parent, you want your children to be the best version of themselves. We obviously love each other but many of us (and our kids and our kids’ spouses) can struggle to agree on what restaurant to go to, let alone agree on sizeable, co-mingled retirement funds.

So if you expand your SMSF to soak up franking credits, do so with your eyes wide open.

One option you may consider is to roll the Australian equity portion of your SMSF to the Australian equity option of an industry fund. While you still won’t directly get a franking credit refund, the low-cost industry fund will use excess credits to smooth the fund’s overall returns which will be reflected in your unit price.

So while the direct benefit to you will be significantly diluted, you may also save on fees. Just don’t hold your breath waiting for an advisor tied to a bank to give you that advice. If you’re in a unit based retail super fund, that fund is more likely to just pocket your refund in its profits.

My advice is don’t panic and hold your position until after the election. Wait for the details of the legislation and evaluate Labor’s ability to pass it, then act on an informed basis.


Tim Mackay is an independent advisor at Quantum Financial. You can view his personal website at www.theindependentfinancialadvisor.com.au

You can view the original Australian Financial Review article by Tim Mackay ‘Why inviting your kids into SMSF is a bad idea’ in PDF format below.

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