Taxation implications
From 1 July 2007 super is supposed to be tax-free to those over 60.  However, the situation is different upon death.  From 1 July 2007, a member’s super benefit will be split into two components: a taxable component and tax-free component.  The taxable component will be comprised of things like deducted contributions.  The tax-free component will be comprised of things like undeducted contributions and the pre-July 83 component.

If a ‘dependant’ (as defined by tax law) receives a deceased member’s super benefit, it will be entirely tax-free.  However, if a non-dependant (eg, an independent adult child) receives a deceased member’s super benefit, 16.5% tax will generally be payable on the taxable component.

From 1 July 2007 a new proportioning rule will apply.  This rule means that any payments from a super fund will be comprised of the taxable and tax-free components in proportion to the total components held in the member’s super interest in the fund.

Consider a widower who dies leaving two children (one dependent and one independent) and $2 million in an SMSF comprised of a $1 million taxable component and a $1 million tax-free component.  If the interest is paid equally to each child, the dependant child receives a $1 million after tax but the independent child receives only $917,500 after tax.

However, if the widower had had two SMSFs (one for the taxable component and one for the tax-free component), the benefit from the taxable component SMSF could have been paid to the dependant child tax free and the benefit from the tax-free component SMSF could have been paid to the independent child tax free.  A tax advantage of $82,500.

Multiple SMSFs can also affect land tax payable.  For example, Victorian land tax does not group SMSFs together.  Therefore, if Victorian land is held through two SMSFs instead of one, an extra tax-free threshold and lower rates of land tax apply.  For example, Eric’s SMSF holds two blocks of Victorian land, each worth $1 million.  His SMSF’s annual land tax bill would be $17,000.  If Eric had two SMSFs and each SMSF owned one block of land each, the total annual land tax bill of both SMSFs would be $6,960.

Naturally, tax minimisation should never be the sole or dominant purpose of a transaction, course of conduct, etc, as revenue offices have wide powers to undo tax benefits obtained from tax-driven schemes.

Asset protection
If the trustee of an SMSF is sued, all the assets of the SMSF are at risk.  The risk of potential plaintiffs is much higher for SMSFs that hold direct property.  Consider the tradesperson cleaning your investment property’s gutters who falls, or the tenant who trips.

Although insurance should come to the rescue, this isn’t always the case.

The answer can be to hold fewer eggs in any one basket.   If SMSF 1 holds two properties, and a plaintiff sues over an injury occurring on property 1, both properties might have to be sold to cover any court order for damages, etc.  If, however, SMSF 1 holds property 1 and SMSF 2 holds property 2, only property 1 would have to be sold.

And remember, a $200,000 SMSF is half as attractive to a potential plaintiff as a $400,000 SMSF.  By having multiple SMSFs, risk can be managed and potential plaintiffs nipped in the bud.

Succession Planning
Succession planning is one of the most overlooked areas of SMSFs.  Everyone will die, but few actually know or plan what will happen to their SMSFs upon death.  Recently, we have seen a dramatic increase in litigation between children and second spouses regarding control of their deceased parent/spouse’s SMSF.

One answer for those with a second or subsequent spouse is to establish two SMSFs.  Get the spouse on board as a co-trustee of the first SMSF and get the kids from the prior relationship on board as co-trustees of the second SMSF.  Then split assets between the SMSFs in the proportion that the various parties should receive them upon death.  Where trustees have the discretion and ability to pay a deceased’s super benefit to themselves, they tend to do so.

Extra costs and extra work
The advantages of asset protection and succession planning must be weighed against the extra administration costs (eg, establishment costs, accounting fees, audit fees, etc).  And then there is the non-cash cost: two SMSFs may increase the paperwork headache.

This article contains general information only and is no substitute for expert advice. The article titled "Two DIT super funds better than one" was complioed by Bryce Figot.