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Reasons for winding up your self-managed super fund

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When he was diagnosed with a serious illness at 71, Dave1, a retired lawyer, turned his attention to his two-member self-managed super fund.

A savvy investor, he had regularly beaten the returns of big funds.

But he and his wife wanted to travel more and his wife wasn't up to running the SMSF, so they rolled it over into a large, low-cost industry fund.

wrap up self-managed super

There are many reasons people wind up SMSFs: they may find DIY, with all its compliance and complexity too demanding.

"The main reasons people wind up the fund are due to the failing health of one of the members, particularly in a one- or two-member fund," says Graeme Colley, the director of technical and professional standards at the SMSF Association.

"The other reasons are the fund's assets have been drawn on so it's not viable cost-wise to run the SMSF any more."

Once the account balance in pension phase has been run down, paying $2000 to $2500 in annual fees hardly makes sense. At this point there is often the dilemma of whether to roll it over to a low-cost super fund or keep it outside super (see below).

Max Newnham, a specialist SMSF adviser and founder of smsfsurvivalcentre.com.au, says you need to think twice before taking money out of the super environment as it could come back to haunt you.

"Once you are 65 and not working, it is a very important decision to take your money out of the super environment because you can't get it back in, especially if you are over 75, or you are 65 to 75 and not working," he says.

"It ignores the fact that the person might be a home owner who later downsizes and ends up with a significant amount of money - and now all this money is being taxed. You have to be very careful if you do this and take advice."

Where the SMSF has considerable assets the burden can be eased.

"If, for example, the couple above got advice and felt confident in the person giving the advice and the investments of the fund were put into simpler, more easy-to-manage investments with less to worry about, that could be an option."

He says people like to have an SMSF in pension phase because they don't have to deal with bureaucracy to access money.

Key steps to wind up your SMSF

Before you wind up your SMSF, get professional advice to make sure you haven't overlooked potential downsides. If it's clear you should proceed:

  • Check the trust deed for wind-up instructions. All trustees or directors should agree about winding up the fund and document their decision.
  • You will need to pay out or roll over the balance of members' super to another fund, which may involve selling assets.
  • A final audit must be completed before you lodge the last SMSF annual return.
  • Remember to indicate the fund is being wound up.
  • You need to pay any outstanding tax and other debts before you close your fund's bank account.

Also visit the ATO site for more on winding up your super fund.

Enjoy tax-free income outside super

So how much tax-free income can a couple have if they wind up their SMSF and invest in their own names? Graeme Colley gives the example of George, 70, and Penny, 67.

They each have access to the tax-free low-rate threshold of $18,200 a year and they can also access the seniors and pensioners tax offset if their adjusted income is under the threshold.

That means they can have a taxable income of up to $28,974 each ($57,948 combined) without having to pay tax. (The benefit of the seniors and pensioners offset cuts out at a combined taxable income of $83,580.)

If the return on their investment is 3% a year, they could have up to $1 million in investments before either of them starts to pay tax.

At higher rates of return, the amounts they can invest to receive income just under the threshold are $461,129, for a 7% return, and $645,580 for a 5% rate of return.

Colley advises anyone contemplating such a move to take professional advice first.

"Maybe a combination of a tax-free pension from super and investments in their own name will do the trick, especially where interest rates and dividends may increase and they could end up exceeding the tax-free thresholds for seniors and pensioners."

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Vita Palestrant was the editor of the Money section of The Sydney Morning Herald and The Age. She has worked on major metropolitan newspapers here and overseas and has won several prestigious journalism awards including the 2001 Citigroup Award for Excellence in Journalism, Personal Finance Category.
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