Is it time for you to exit your SMSF?
Plan ahead for what will happen if you decide to wind up your fund
Before starting a self-managed super fund (SMSF), members - who are also the fund's trustees - need to consider the circumstances under which they will wind up the fund and how they will proceed when the time comes.
Exiting at the right time will make for a smoother, less stressful transition down the track.
The most common reasons for winding up an SMSF are failing health, finding all the compliance and complexity too demanding, divorce and a low balance that makes the SMSF too costly to justify.
Genene Wilson, a senior financial planner at the Omniwealth advisory group, says it isn't just death and ageing that trigger a wind-up.
"As a planner working across the spectrum of people's financial life, we expect to see an increasing number of younger clients for whom running their SMSF is no longer viable or good for them. A number of new clients recently elected to wind up their fund, some of whom are finding it too difficult or stressful. An SMSF is not right for everyone."
She cites the case of a trustee of a two-member fund that is no longer viable from an account balance point of view.
One member of the couple can no longer make contributions because of mental health problems and the couple are taking steps towards matrimonial separation.
While the healthy member holds an enduring power of attorney for the spouse, he is unwilling to roll the member out and wind up the fund due to a concern about perceptions of not acting in the best interest of that member.
At times like this Wilson says it is critical to get good advice not only from a planner as well as a lawyer, accountant and tax expert.
While some members intend to keep their SMSF after divorce (most SMSFs are made up of married couples) things can change when a new partner arrives on the scene.
"Trustees need to assess whether it is better to quit sooner rather than later. Perhaps waiting will dredge up old hurts from the split."
In the case of death, the remaining spouse may lack the skill and confidence to run the fund.
"In some cases, where the trustee is a corporate, the shares in the trustee company pass to another person who can assist the remaining member.
However, this is not always the case - the shares may pass under the will to the wrong person and it may cause problems for the fund's ongoing operation."
Members also need to consider what type of fund to roll over to.
"Depending on the assets held within the SMSF and the phase (accumulation or pension), a wrap account may be a suitable option, as the wrap account may offer more flexibility than a retail/industry or public offer fund, albeit those type of funds are now offering greater access to products such as term deposits, direct shares and exchange traded funds."
Wilson recommends anyone wanting to start an SMSF first complete a free tax office course for trustees so they understand what's involved in running a fund.
It's best to seek professional advice when winding up a fund, says Omniwealth's Genene Wilson.
The following can be carried out by, or with the assistance of, a planner, accountant or SMSF administrator:
- Decide if the fund is to be wound up and the time frame.
- Check the trust deed. The trustees/members need to formally agree.
- Will assets be cashed out, taken as a lump sum or rolled over to another fund.
- Can assets be transferred in-specie to the member or the new fund?
- Assess the costs and the tax implications and set money aside.
- All prior year tax and compliance obligations should be brought up to date.
- Final accounts prepared, audit completed, tax office notified, expenses/taxes paid.
- Bank account open to receive income previously accounted for and tax refund.
- Alternatively, cash could be held on trust to pay any liabilities.
- The fund is wound up. Once it is wound up it can't be reactivated.