They say all good things must come to an end, and it’s no different with self-managed super funds. Australians are discovering the benefits of running their own fund in record numbers, but at some point all these funds will need to be wound up. The sooner you start thinking about your exit strategy, the smoother the process will be.
Australians hold close to 600,000 SMSFs and the numbers continue to grow strongly. According to the latest Australian Taxation Office (ATO) figures, we opened 34,320 new funds in 2015. Even so, 8,914 funds were quietly wound up and that figure will only increase as the sector matures.i
ASIC’s consumer website MoneySmart goes as far as suggesting that intending trustees should think about the end before they begin. At the very least, trustees need to have an understanding of the winding up process, including the disposal and distribution of fund assets.
Reasons for winding up
There are many reasons to wind up an SMSF. The death or failing health of an older member is perhaps the most common trigger. While it is possible to bring adult children into an SMSF to ensure its continuity, this is not always practical.
With the age of SMSF members getting younger – the median age fell below 50 for the first time in 2015 – a range of other issues are likely to trigger a wind up. Some people may simply tire of the responsibility and administrative burden. Divorcing couples may decide it’s best to sever a joint fund. Or a fund’s assets may have reduced to such a level that it’s no longer cost effective to run.
Younger members are also more likely to move overseas for work, becoming a non-resident for Australian tax purposes. Depending on your length of absence, your fund could become non-complying and income will be taxed at the highest marginal tax rate.
Steps to follow
There are a number of steps that must be taken to wind up an SMSF. If they are not done correctly, or steps are completed in the wrong order, it could result in a blowout in costs due to the need for additional audits and financial reporting.
The ATO provides guidelines to help you navigate the process (see box), beginning with reading the SMSF trust deed. This is because it may set out requirements for winding up the fund.
It’s also important to deal with each member’s assets and contributions correctly and according to their wishes. You will need the agreement of each member or, in the case of a corporate trustees, directors. If a member has preserved benefits and has not met a condition of release, their benefits must be rolled into another fund. If they have met a condition of release, their benefits can be paid out as a lump sum.
One step the ATO doesn’t go into is the sale or transfer of investments in the fund. Where possible, it’s preferable to sell investments with large unrealised capital gains while the fund is in pension phase. If this is done in accumulation phase the fund will be liable for 10 per cent tax on any gains made. Alternatively, some assets may be transferred ‘in specie’. This can be to the member, where they are eligible for a lump sum benefit, or to the receiving fund in the case of a rollover.
Before a final audit is conducted, you need to ensure that all previous years’ financial statements, tax returns and other compliance obligations have been finalised. Then trustees should have draft financial statements prepared and lodge the fund’s final annual return with the ATO.
The ATO must be informed in writing within 28 days of a fund being wound up. In practice, an SMSF can’t lodge its final return until after the end of the financial year in which it was wound up, so the ATO will need to be notified first. The SMSFs bank account will also need to be kept open to receive any final tax refund and interest payments that may have accrued.
You may also find that some expenses don’t fall due until after the SMSF is due to be wound up. In this case you will need to set aside enough cash to be retained in trust by the former trustees until all expenses are paid.
This is by no means an exhaustive account of the winding up process. Even so, it’s clear that getting out of an SMSF can be harder than getting into one, often at a time of personal stress. To minimise the costs and risks, it’s important to seek professional advice as early in the process as possible.
If you need advice about your SMSF exit strategy, don’t hesitate to give us a call Centaur Financial Services.
To wind up your fund:
i ATO, https://www.ato.gov.au/Super/Self-managed-super-funds/In-detail/Statistics/Quarterly-reports/Self-managed-super-fund-statistical-report-March-2016/?anchor=SMSFannualdata#SMSFannualdata