{"id":13551,"date":"2022-05-24T12:01:54","date_gmt":"2022-05-24T02:01:54","guid":{"rendered":"https:\/\/www.dbalawyers.com.au\/?p=13551"},"modified":"2022-05-24T12:08:29","modified_gmt":"2022-05-24T02:08:29","slug":"why-admit-a-conditional-member-in-an-smsf","status":"publish","type":"post","link":"https:\/\/www.dbalawyers.com.au\/smsf-strategy\/why-admit-a-conditional-member-in-an-smsf\/","title":{"rendered":"Why admit a conditional member in an SMSF?"},"content":{"rendered":"<p><img loading=\"lazy\" decoding=\"async\" class=\"alignright wp-image-13429 size-full\" src=\"https:\/\/www.dbalawyers.com.au\/wp-content\/uploads\/2016\/08\/Admit-a-conditional-member.jpg\" alt=\"\" width=\"300\" height=\"203\" \/><\/p>\n<p>If the relationship between SMSF members falls apart, seeking to remove a member from the fund can prove difficult and expensive. Conditional membership can assist with an exit strategy. This is important to consider before admitting a new member especially a child or a second\/subsequent spouse.<\/p>\n<p>With a DBA Lawyers\u2019 SMSF deed, new members can be admitted on a conditional basis as it has all the relevant powers. Further, we can assist with a special suite of documents that can be tailored to also include any special conditions that you want.<\/p>\n<h3>Who is a conditional member?<\/h3>\n<p>The DBA Lawyers\u2019 SMSF deed authorises the trustee to, upon on an \u2018exit event\u2019 occurring, remove a conditional member from the fund. This includes:<\/p>\n<ul>\n<li>rolling over their benefit to the member\u2019s nominated or default fund; or<\/li>\n<li>paying out the member\u2019s benefit if they have satisfied a relevant condition of release,<\/li>\n<\/ul>\n<p>One or more exit events can be specified, eg, on the divorce or separation of a couple who are members of the fund.<\/p>\n<p>ATO statistics suggest that around 70% of SMSFs<sup>i<\/sup> are two member funds and anecdotal evidence suggests the vast majority of these members in around 420,000 SMSFs (600,000 SMSFs x 70%) would be in a married, de facto or spousal relationship. The total number of divorces granted in 2020 in Australia was 49,510.<\/p>\n<p>Assuming there is no spousal relationship, conditional membership can still be appropriate for other potential members such as children or other family members, relatives or friends and especially business \u2018partners\u2019.<\/p>\n<h3>Why is conditional membership useful?<\/h3>\n<p>A member\u2019s consent is required prior to removing them from the fund. Obtaining this consent in contentious circumstances can prove quite difficult and costly and may take years to resolve. However, with conditional membership, consent is obtained when the \u2018conditional\u2019 member is first admitted as a member to the fund. This means that on the occurrence of one or more exit events, the SMSF trustee can remove the member.<\/p>\n<p>We are aware of numerous disputes (where conditional membership documents were not in place) where the departing member claimed payments well above their account balance before they agreed to exit the fund. In one case, the departing member demanded a substantial sum of cash from the other member (outside the fund) to \u2018clinch\u2019 the deal.<\/p>\n<h3>What conditions or exit events are typically appropriate?<\/h3>\n<p>There are a range of exit events that could be considered for giving rise to a right to remove a member, including:<\/p>\n<ul>\n<li>divorce or separation (in the case of a de facto relationship);<\/li>\n<li>as the member(s) with the majority account balance determine;<\/li>\n<li>material disagreement which is not resolved within 30 days;<\/li>\n<li>where business associates share the same SMSF and:\n<ul>\n<li>their business relationship ceases; or<\/li>\n<li>there is a triggering event under the buy-sell (or equivalent) agreement; or<\/li>\n<\/ul>\n<\/li>\n<li>any significant legal dispute between the parties that is not resolved within a specified time.<\/li>\n<\/ul>\n<p>Conditional membership can assist if a current SMSF member wants to admit, say, a second\/subsequent spouse or a child and also wants the flexibility of removing them if a dispute or relationship breakdown ever arises.<\/p>\n<p>Naturally, a binding financial agreement (<strong>BFA<\/strong>) is also highly recommended if a spousal relationship exists as the family court has broad powers to make orders that may cover an SMSF trustee and third parties to the relationship. Note the family court also has power in relation to a de facto relationship. The BFA should also deal with who gets to stay in the SMSF in the event of a marital or de facto relationship breakdown.<\/p>\n<h3>Key steps for admitting a conditional member<\/h3>\n<p>Broadly, the following steps should be followed:<\/p>\n<ul>\n<li>Before embarking on this strategy we recommend that the SMSF trustee has the fund\u2019s document trail reviewed by an SMSF lawyer and obtains advice to ensure the advantages, disadvantages and risks of conditional membership are properly understood.<\/li>\n<li>Ensure the SMSF deed has relevant powers (eg, the DBA Lawyers\u2019 SMSF deed includes such power).<\/li>\n<li>The SMSF trustee company should have a constitution that contains appropriate wording that allow the removal of the conditional member as a director and shareholder of the company (eg, the DBA Lawyers\u2019 constitution includes appropriate wording).<\/li>\n<li>The conditional member obtains their own independent advice (including accounting, legal and financial product advice).<\/li>\n<li>Where a spousal relationship exists, a BFA is prepared which may be designed to cover all assets or be more specific to key assets and to cover the SMSF.<\/li>\n<li>Further points to consider are covered in our newsfeed articles below. We recommend you especially review the first article below.<\/li>\n<\/ul>\n<h3>Conclusion<\/h3>\n<p>Unless carefully and properly implemented with quality documentation and qualified and expert legal assistance, conditions sought to be imposed on admitting a member may be readily avoided or side stepped. Naturally, DBA Lawyers would be pleased to assist in providing quality advice and documentation to properly and legally admit a conditional member.<\/p>\n<h3>Related articles<\/h3>\n<ul>\n<li><a href=\"https:\/\/www.dbalawyers.com.au\/admit-conditional-member\/\">Admit a conditional member<\/a><\/li>\n<li><a href=\"https:\/\/www.dbalawyers.com.au\/smsf-compliance\/adding-a-member-to-an-smsf-pros-and-cons\/\">Adding a member to an SMSF \u2013 pros and cons<\/a><\/li>\n<li><a href=\"https:\/\/www.dbalawyers.com.au\/investments\/ways-remove-member-smsf\/\">Ways to remove a member from an SMSF<\/a><\/li>\n<li><a href=\"https:\/\/www.dbalawyers.com.au\/smsf-strategy\/admit-conditional-member\/\">Admit a conditional member<\/a><\/li>\n<li><a href=\"https:\/\/www.dbalawyers.com.au\/smsf-strategy\/guide-smsf-exit-plan\/\">Your guide to an SMSF exit plan<\/a><\/li>\n<li><a href=\"http:\/\/www.dbalawyers.com.au\/smsf-deeds\/the-advantages-of-conditional-membership-in-an-smsf\/\">The advantages of conditional membership in an SMSF<\/a><\/li>\n<\/ul>\n<p style=\"text-align: center;\">*\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 *\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 *<\/p>\n<p>By Shaun Backhaus (<a href=\"mailto:sbackhaus@dbalawyers.com.au\">sbackhaus@dbalawyers.com.au<\/a>), Senior Associate, and Daniel Butler (<a href=\"mailto:dbutler@dbalawyers.com.au\">dbutler@dbalawyers.com.au<\/a>), Director, DBA Lawyers<\/p>\n<p>Note: DBA Lawyers presents regular SMSF Online Updates. For more details or to register, visit <a href=\"http:\/\/www.dbanetwork.com.au\/\" target=\"_blank\" rel=\"noopener\">www.dbanetwork.com.au<\/a> or call 03 9092 9400.<\/p>\n<p>For more information regarding how DBA Lawyers can assist in your SMSF practice, visit <a href=\"https:\/\/www.dbalawyers.com.au\/\">www.dbalawyers.com.au<\/a>.<\/p>\n<p>This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional.<\/p>\n<p>16 May 2022<\/p>\n<p>&#8212;&#8212;&#8212;&#8212;&#8212;&#8212;&#8212;&#8212;&#8212;&#8212;&#8212;&#8212;&#8212;-<\/p>\n<p><sup>i <\/sup>SMSF quarterly statistical report December 2021<\/p>\n<div class=\"printfriendly pf-button  pf-alignleft\"><a href=\"https:\/\/www.dbalawyers.com.au\/smsf-strategy\/why-admit-a-conditional-member-in-an-smsf\/?pfstyle=wp\" rel=\"nofollow\"  title=\"Printer Friendly, PDF & Email\"><img decoding=\"async\" class=\"pf-button-img\" src=\"https:\/\/cdn.printfriendly.com\/buttons\/printfriendly-pdf-button.png\" alt=\"Print Friendly, PDF & Email\" style=\"width: 112px;height: 24px;\"  \/><\/a><\/div>\n","protected":false},"excerpt":{"rendered":"<p>If the relationship between SMSF members falls apart, seeking to remove a member from the fund can prove difficult and expensive. Conditional membership can assist with an exit strategy. This is important to consider before admitting a new member especially a child or a second\/subsequent spouse. With a DBA Lawyers\u2019 SMSF deed, new members can [<a class=\"read-more\" href=\"https:\/\/www.dbalawyers.com.au\/smsf-strategy\/why-admit-a-conditional-member-in-an-smsf\/\">read more<\/a>]<\/p>\n","protected":false},"author":35,"featured_media":6415,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[35,37,38],"tags":[],"ppma_author":[140],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v22.5 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Why admit a conditional member in an SMSF? | Leading SMSF Law Firm %<\/title>\n<meta name=\"description\" content=\"If the relationship between SMSF members falls apart, seeking to remove a member from the fund can prove difficult and expensive. 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