Children and SMSFs: Superannuation Under 18
Understanding superannuation under 18 (at a young age) is not just about preparing for retirement, it’s about building a strong financial foundation for life. It empowers every member to make informed decisions, secure their future, and navigate various financial challenges with confidence. The knowledge gained about superannuation under 18 is an investment in their financial well-being that can pay dividends throughout their lifetime.
The concept of Self Managed Super Funds (SMSFs) is gaining prominence in retirement planning, especially with the flexibility and control they offer. But when it comes to children and SMSFs, the question arises: Can a child be a member of an SMSF? This article unpacks that question aligned with authoritative guidelines provided by the Australian Taxation Office and the Superannuation Industry (Supervision) Act 1993 (SISA).
Can a Child be a Member of a SMSF?
The simple answer is ‘Yes’.
However, admitting a child (under 18) member to join a SMSF is a decision that requires careful consideration.
Eligibility Criteria for Superannuation Under 18 Membership
Unlike some other superannuation funds, SMSFs do not have an explicit age restriction for members. However, certain conditions must be met:
A child under the age of 18 can be a member of an SMSF but cannot be a trustee or director of a corporate trustee. Instead, a parent, guardian or legal personal representative (LPR) must act as a trustee on the child’s behalf and in the case of a corporate trustee, as a director on the child’s behalf.
Matters to Consider with Superannuation Under 18
There are many important aspects to consider before admitting a child under 18 to join a SMSF.
SMSF Deed
Does the SMSF Deed permit a child member? If it does not or is silent on the matter, the deed will need to be amended to permit the admission of the child to be a member of the SMSF. This is a relatively simple process and is done by way of a Deed of Variation and an accompanying trustee resolution, both of which are prepare by a lawyer.
Who Will Act as the Child’s Representative
Generally, a parent who would ordinarily be a member of the SMSF already would represent them as a trustee or director of the corporate trustee. Otherwise, a guardian or Legal Personal Representative (LPR).
It is important to note where the trustee is a company, the representative must be appointed as a director before or at the time as the child is admitted as a member of the SMSF.
Investment Strategy
Generally, admitting a new member to the fund will require the trustee to review and consider all the mandatory elements of the Investment Strategy (such as risk, investments, liquidity, ability to pay benefits and whether to hold insurance cover for each member) and tailor it specific to the SMSF’s circumstances.
Even if the mix of investments is to remain the same, it would be prudent to update the existing investment strategy to document the trustee has considered the age, employment status and retirement needs of the members. Further, another example of why the current investment strategy should be updated is to document the trustee’s consideration of the personal insurance requirements of the child member. It could be the parents may have documented in the existing investment strategy they do not require personal insurance (e.g. Life / TPD) within the SMSF. However, the needs of the child member may require personal insurance and therefore the investment strategy will need to be updated to document this decision.
Turning 18
Once a child reaches 18, they can become a trustee or director of the corporate trustee, subject to the other legal qualifications and they must do so within 6 months of their 18th birthday.
Superannuation Contributions
A child who is working can direct their employer to pay their superannuation guarantee entitlements into the SMSF.
Further, that same child can contribute after tax money they have earned into the SMSF and claim a tax deduction. They cannot claim a deduction for contributions that are from another person (e.g. from their parent) on their behalf.
A parent or grandparent can make contributions to the fund on behalf of the child member. They are treated as non-concessional contributions and count toward the child’s contribution cap – not the contributor’s contributions cap.
A child has the same contribution caps as an adult and is eligible to apply unused prior year contribution caps where their total superannuation balance is less than $500,000 (legislative limit 2024).
Risks
Additional members may lead to family disputes over investment decisions or fund objectives.
If the fund is invested in one or two main assets, such as property, there may not be enough liquid funds to pay out an existing member following a dispute, resulting in one or more assets needing to be sold, which may come at a bad time in the market cycle.
A real-life example of possible risk played out in an unfortunate set of circumstances that ended up in court (Triway Superannuation Fund and Commissioner of Taxation [2011] AATA 302), where the caring parents covered up their drug addicted son’s misappropriation of the SMSFs cash resulting in losing the parents’ retirement funds. The son was a member of the SMSF and as such the SMSF Auditor had no choice but to notify the ATO of the serious breach.
Death of the Child before age 18
Generally, a child lacks legal capacity and there isn’t provision for a parent or guardian to sign a death benefit nomination on behalf of the child. To avoid the child benefits being paid out upon death being subject to the discretion of the trustee/s, it may be prudent planning to amend the SMSF deed to remove that discretion and instead make the death benefit payment automatically go to the child’s estate.
It is highly recommended before a child is introduced to a SMSF, specialist estate planning advice is obtained.
Pros and Cons of Including a Child as a Member of a SMSF
Pros
| Aspect | Advantage |
| Family Engagement | Involving children may help instil financial responsibility and understanding. |
| Tax Efficiency | Utilising tax concessions may lead to potential tax benefits. For example, a parent may make non-concessional contributions on behalf of the child, and the contributions will not count toward the parents’ contributions cap. |
| Succession Planning | May facilitate smoother wealth transfer and alignment with family financial goals. |
| Investment Flexibility | Potentially broadens the SMSF’s investment strategy together with a bigger pool of capital to invest. |
Cons
| Aspect | Disadvantage |
| Complexity | This adds another layer of legal, compliance, and administrative complexity. |
| Cost | Generally considered to increase management and compliance costs. |
| Potential Conflicts | May lead to family disputes over investment decisions or fund objectives. Many possible legal implications could arise. |
Conclusion
An SMSF offers a personalised approach to retirement planning, with extensive control and flexibility. With 6 members allowed, a SMSF could for example consist of mum and dad together with their four children. If this is something you are considering, we highly recommend reading our comprehensive blog Choosing Individual or Corporate Trustee for SMSFs.
The decision for superannuation under 18 and to include children in a SMSF and make contributions to their superannuation is a multifaceted decision that presents both opportunities and risks that need to be weighed up. It requires careful consideration in the context of the child’s future financial needs, the family’s overall financial strategy, and the regulatory environment.
As a CPA accounting firm in Caloundra QLD Australia, Wardle Partners Accountants and Advisors have been specialising in SMSF set-ups, administration, processing, compliance advice, accounting, taxation, and wind-ups for over 40 years. Please note that the above information is general in nature. Wardle Partners does not hold an Australian Financial Services Licence (AFSL) and our company nor any of our employees or directors are not authorised representatives of an AFSL. We do not provide financial product advice or recommend any financial products either expressly or implied.
By providing this comprehensive insight on superannuation under 18 and the important matters to consider, we hope to offer valuable information for those considering this path for family wealth management and the risks associated therewith. The linkages to other blogs within this series, such as Understanding the Trustee’s Role and Most Common SMSF Set Ups offer a more in-depth understanding of related topics, forming a complete guide for SMSF management. If you have any questions or need professional assistance, feel free to contact us or schedule a free consultation with one of our SMSF experts.
Did You Know?
Children as young as infants can be members of SMSF and the legal guardians or parents would usually act as trustees until they reach the age of 18.
