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Setting up a super fund for grandchildren needs planning
Establishing a superannuation fund for grandchildren is allowable in Australia but there are some caveats to be aware of, a leading industry figure has warned.
In Australia, a superannuation account can be established on behalf of a child at any age subject to the rules/limits of each fund.
David Busoli, principal of SMSF Alliance said if considering this in relation to an SMSF, it really depends on the age of the grandchild as the trustee–member nexus is treated differently.
“If the grandchild is over 18, they must become a trustee, or director of the corporate trustee. If they are under 18, they need to be represented by a parent or guardian who will act in their stead until they turn 18,” he said.
“In either case, the issue of control needs to be carefully considered. Does the SMSF’s voting power rely on a simple majority or on member balances? Either the deed or constitution of the corporate trustee, or both, need to be considered. Perhaps it would be advisable for the grandparents to utilise a retail fund and avoid these issues.”
Where a retail fund accepts minors, the process of account opening is reasonably straightforward. An adult needs to complete the membership paperwork, and as minors aren't legally able to sign contracts, the adult also needs to provide proof of being a parent or legal guardian and authorise the child's membership application.
It's also worth organising a tax file number (TFN) for the child as part of the account opening process. The ATO cautions that without a TFN, a super fund will not be able to accept any non-employer contributions.
In regard to what can be contributed, Busoli said an individual under the age of 18 can make non-concessional contributions and even use the three-year bring forward amount.
“Concessional contributions can only be made if they are working or have turned 18 by 30 June. Interestingly, once concessional contributions can be made, the full five-year unused concessional contribution cap can be used assuming they have not tripped the $500,000 ineligibility threshold.”
He warned that contributions made by a grandparent for their grandchild will be regarded as concessional.
“To avoid this, any such amount should firstly be gifted to the grandchild who will then make the contribution. Payments from a company or trust will be similarly treated.,” he said
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