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Admit a conditional member

Admit a conditional member

With a DBA Lawyers’ SMSF deed, new members can be admitted to an SMSF on a conditional basis. Needless to say, having a DBA Lawyers’ SMSF deed is a pre-requisite for having conditional members since it has all the requisite provisions.

Who is a conditional member?

The DBA Lawyers’ SMSF deed allows a conditional member to be paid out (if they have satisfied a relevant condition of release) or have the member’s benefits rolled-out to another superannuation fund when a specific event occurs or at a specified time. In contrast, without conditional membership documentation in place for the relevant member on their admission to the fund, the member’s consent will be required prior to rolling or paying them out. This can prove difficult and costly and may take years to resolve.

Why is conditional membership useful?

As mentioned above, normally you would need the consent of the member before they are removed from an SMSF. However, with conditional membership, consent is obtained when the conditional member is first admitted as a member. This means that on the occurrence of one or more specific trigger events, the SMSF trustee relies on the consent at the time of admission to remove the member and pay their benefit (if a relevant condition of release is satisfied) or transfer their benefit to another complying superannuation fund.

What type of conditions may be placed on a ‘conditional’ member?

There are a range of triggering conditions that could be considered for giving rise to a right to remove a member, including:

  • divorce or separation in the case of a de facto relationship;
  • as the member(s) with the majority account balance determine;
  • where a member fails to attend to their usual trustee/director duties (eg, attending at least 4 trustee/director meetings annually);
  • material disagreement which is not resolved within 30 days;
  • where business associates share the same SMSF and:
    • their business relationship ceases; or
    • there is a triggering event under the buy-sell (or equivalent) agreement; or
  • any significant legal dispute between the parties.

Conditional membership is ideal if a current SMSF member wants to admit, say, a second spouse or a child, but wants the flexibility of paying or rolling out their second spouse’s or child’s balance in the event of a dispute or relationship breakdown. This can be accommodated when the second spouse or child is admitted as a member since an event could be specified as one of the conditions on which the conditional member would be removed from the fund, subject to any court order.

Removing a member without a conditional membership strategy

Where it is desirable to remove a disgruntled or uncooperative SMSF member, you would certainly wish that the member was originally admitted to the SMSF as a conditional member.

For instance, if the SMSF deed does not expressly provide for conditional membership, the member(s) may need to apply to the court (typically the Supreme Court or if there is a family law dispute, the Family Court) for intervention. (Please note that the Family Court jurisdiction is more flexible and if there is a matter before the Family Court, specific family law advice should be obtained.) Courts are generally reluctant to intervene in such situations unless the member has contravened the law. Additionally the time, cost, stress and inconvenience associated with any disputed legal action are likely to be very substantial.

Thus, unless there have been substantive breaches of trustee and/or director duties committed by the member that needs the trustee and/or director to be removed, the court may not provide any practical solution. In these cases, there is the prospect of the SMSF being placed in a precarious position while the parties seek to resolve their differences. Typically, during these periods, the parties do not cooperate with each other to ensure the fund remains fully compliant and often the tax and regulatory returns and other compliance matters are not attended to in a timely manner. This can result in numerous penalties and potentially non-compliance. While this can disadvantage all members, it impacts more on those with the greater account balances. Naturally, fairness dictates that the member(s) with the greater account balance should have greater say in running an SMSF (as reflected in the DBA Lawyers’ SMSF deed).

One method of minimising the uncertainty related to admitting a spouse is to also ensure a binding financial agreement is in place that covers what happens in respect of the SMSF (in the event of a marital or relationship breakdown).

What needs to be in place before you admit a conditional member?

When admitting a new member to an SMSF, DBA Lawyers recommends that you have a corporate trustee since there are many advantages of a corporate trustee over individual trustees, especially in regards to admitting a conditional member. Further, a conditional member does not need to be a shareholder in the company. Some of the main advantages are:

  • asset protection
  • flexibility to admit/cease members without any transfer of assets between individual trustees
  • greater administrative ease
  • the long-term benefits of a company generally outweigh the up-front costs

DBA Lawyers can assist in providing quality documentation to establish corporate trustees of SMSFs. We also provide documentation to change the trustee of an SMSF. Click here if you require a change of trustee.

To learn more about the merits of a corporate trustee instead of individual trustees, click here.

If the fund has a corporate trustee, additional documentation is required to admit the person as a director.

For some conditional members who do not want to become a director and are happy to let other member(s) represent them as a director in their stead, they can appoint the other member(s) as their attorney under an enduring power of attorney.

Significant penalties can be imposed if the trustee/member rules are not complied with. Accordingly, expert assistance should be obtained if there is any doubt.

Admit a conditional member

DBA Lawyers would be pleased to advise or prepare documentation in relation to conditional membership, please click here for further information.

Related articles

The advantages of conditional membership in an SMSF at: The advantages of conditional membership in an SMSF.

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