There are many reasons why Trustees may decide to wind up their SMSF. We have many clients of other accountants/advisers who seek us out because of our experience in winding up SMSFs. The most common reasons for wind ups which we encounter are:
- divorce
- death
- diminished mental capacity
- low SMSF balances making the SMSF no longer a cost-effective option
- ATO action most commonly due to illegal early release of super or investing in assets in contravention of the Super Laws*
It is important to note that for some of these reasons an SMSF has simply run its course and is no longer a viable option, but for many reasons it is a direct result of receiving no or poor advice at the initial stages.
The Importance of Good Advice
We assess all SMSFs and advise clients on the minimum balance that should be required for an SMSF to be set up as part of our initial advice, so it is disheartening to see Accountants setting SMSFs up with really low balances of $100,000 or even $50,000. With all the fees to take into account, these are not going to be cost-effective in the long run and the clients will be going backwards and eating into their retirement savings.
We also advise clients that they must meet a condition of release before accessing their super, otherwise the ATO will consider it an illegal early release of super and harsh penalties are applicable in these circumstances both for the member and for the Trustee.
We give advice to clients on the Investments that are allowable according to the Super Laws. Unfortunately, with the proliferation of online providers, it is now too easy to set up an SMSF and rollover your super savings into a bank account. Once in the bank account the temptation is to spend the money or invest in assets which may fall foul of the Super Laws. This is why we provide advice to all our clients and keep in touch during the set-up process and beyond.
It does also make it easier to wind up an SMSF if the Trustees have planned for the wind up from the start. This is where a great exit plan comes in.
Exit Plan
An exit plan needs to be tailored to your specific fund. You will need to consider the individual circumstances of your fund and its members. Make sure you document the exit plan, for example in a Trustee minute.
The following should be included in an exit plan:
- Instructions around death benefits, for example death benefit nominations and/or reversionary pensions and ensuring there is no conflict and there is consistency with the Trust Deed
- Appointing an enduring power of attorney
- The estimated costs of winding up the SMSF
- Liquidating assets of the SMSF
- Review of Trust Deed
You should review your exit plan regularly and update it where necessary. Here are some great questions to ask each year:
- Is an SMSF still the right option for the members?
- Do all trustees still have the capacity and time to manage the fund?
- Is it still cost-effective?
- Does your Trust Deed allow for the actions in your exit plan?
Regardless of the reason for winding up an SMSF, we endeavour to make the process as smooth and simple as possible for our clients.
There are a series of procedures required to wind up an SMSF, which should be done by a professional in order to ensure it is done correctly.
Before the end of the Final Year:
- Review the Fund’s Trust Deed and Company Constitution (if applicable) for wind up procedures and consult a professional for legal advice if necessary.
- Get the written agreement of all Trustees to ensure everyone agrees with the decision to wind up the SMSF. This should be documented in a Trustee minute.
- You will need to sell all shares and liquidate all SMSF assets. This must be done in accordance with the Trust Deed and the Super Laws.
- You must pay all expenses, including accounting and audit fees and tax obligations.
- Final franking credits need to be received.
- You will need to open a retail or industry super fund account to receive rollovers.
- Any rollovers will need to be processed through SuperStream.
- If any pension accounts are commuted back to accumulation phase a TBAR will need to be lodged. This should be done as soon as possible, as the new fund will report a new pension as soon as it is commenced which may result in the member exceeding their transfer balance cap. This means you will pay more tax than necessary.
- Ensure any withholding obligations are met when making lump sum payments to members or a lump sum to a deceased estate.
- You will need to close the Fund’s bank accounts and any share trading accounts. (Do not close the bank account until the final tax refund has been received and final rollovers have been completed and the ATO has notified the Trustees that the ABN has been cancelled).
If your Fund has one or more members in pension phase:
- All minimum pension amounts must be paid before the end of the final year.
- The pension account will be commuted before rollovers occur.
After the end of the Final Year:
- The final accounts will be completed and audited and the tax return lodged with the ATO.
- The trustee company should be de-registered with ASIC (this is a separate process).
- The Trustees will receive a letter from the ATO advising the ABN has been cancelled, and the Fund is effectively wound up.
Other Important Considerations
When liquidating assets and commuting pensions to enable rollovers the order is very important so as not to trigger capital gains tax unnecessarily. The advice of an SMSF expert like ourselves is crucial at this stage.
Final Thoughts
You may have made a hasty decision or received poor advice to set up an SMSF, however the good news is you are not stuck in an SMSF forever. You can wind up your SMSF and roll your benefits back into another super fund.
Even if an SMSF has been an excellent investment vehicle for you, diminished mental capacity or the death of one member may have changed your circumstances and winding up your SMSF is now the best option.
Hopefully, you have considered the wind up of your SMSF and discussed your circumstances with your SMSF adviser. We do this with all our clients.
A great exit plan will assist greatly and also valid documents such as reversionary pensions, Binding Death Benefit Nominations (BDBNs), Enduring Power of Attorney (EPoA) and an up-to-date Trust Deed. You can read more about an Enduring Power of Attorney in my blog here.
*The SIS Act is the legislative framework that lays out the requirements for the operation of superannuation funds, including SMSFs. It, along with the Supervision Industry Regulations, makes up what we call ‘super laws’.
