Winding up a Self Managed Super Fund (SMSF)
SMSF's have proven to be an extraordinarily popular retirement structure in Australia, but there will come a time when trustees need to give some thought to winding up the structure. This may occur for a number of reasons, including:
- Retirees may be looking to simplify their lifestyle and remove the need to manage and maintain their fund - moving to an industry, retail or small APRA fund (SAF) will represent a much less time consuming option.
- Age or health concerns may intervene, particularly since some early SMSF adoptees will now be moving into the 70s and 80s.
- Retention of the fund may no longer be cost-effective as the balance runs down over time - bearing in mind that minimum withdrawals increase to between 7% and 9% once members are in their 80s.
- Members who retire overseas, or intend to spend long periods out of the country, and become non-resident for Australian tax purposes, need to put in place measures to ensure that the fund remains an Australian resident. This can be done in a number of ways, but winding up the fund may be the simplest approach available.
- The family group "outgrows" the SMSF - members and trustees leave the fund and there is an inadequate critical mass to continue.
If you are winding up your SMSF, you have two options. Apart from transferring your funds to another complying fund, which we've assumed above, you can also take your money as a lump sum and invest outside super - subject to the member having met a condition of release. Winding up your SMSF may have other implications however, including capital gains tax and stamp duty liabilities relating to the sale of assets held within the fund or with respect to insurance policies.
|We very much recommend professional advice in this context because winding up costs can be quite substantial and should actually be included in any assessment of whether an SMSF suits your circumstances. To provide some practical indication of the costs involved, our advisors would typically charge around $2000 at present to wind up a simple SMSF, with higher charges attaching to the winding up of more complicated funds containing property or non-standard investments. Contact us for a specific quote via the Inquiry form at the bottom of this page.|
Note also that if consideration is being given to winding up an SMSF because of the trustee's age, an alternative is to appoint a replacement trustee who can continue to operate the fund. Super legislation does not preclude someone else from taking over the responsibilities of a trustee, as long as a replacement is your "legal personal representative". Your representative can be appointed under an enduring power of attorney, as a consequence of a court order or guardianship appointment. The process is not uncommon, and will often occur in other situations where where an individual is moving overseas and becoming non-resident for Australian purposes.
The Winding Up Process - Step by Step
The following represents an overview of the winding up process. It is not complete or intended as a substitute for seeking professional advice - and the complexity should really suggest, particularly if you have a complicated fund, that prior prior professional advice is absolutely recommended.
|1.||Review the SMSF trust deed as there may be specific provisions regarding the winding up process.|
|2.||Arrange a trustee meeting and have all trustees/members sign an agreement to close the fund and to specify how and where they would like their benefits paid - whether rolled over into another fund or paid out as a lump sum, if they qualify. Where there is a corporate trustee the directors will need to decide whether the company should be wound up or continue.|
|3.||Calculate any outstanding expenses, taxes and refunds. As the costs of administration and winding up are the first priority, you must provide for accounting, audit, actuarial, legal, and administration fees for work done and still to be done, as well as current and estimated future tax liabilities, including CGT on the disposal of assets|
|4.||Ensure all prior year financial statements, tax returns and other tax and compliance obligations have been finalised and there are no outstanding items.|
|5.||Dispose of assets and calculate member entitlements. Note that the law requires that any sale transactions are carried out on an "arm's length" basis – on commercial terms and at prevailing market values. The proceeds will determine member entitlements (after fees and taxes) and a reconciliation of member balances to net fund assets should be made. Remember that selling assets - or making an in-specie payment to another fund or yourself - is typically a CGT event and must be accounted for in the final return|
|6.||Note that if the fund is paying a defined benefit pension then the actuary must calculate the commutation value (i.e.capital value of the income stream) and, if the fund is paying a pension, ensure that the pro-rated minimum annual amount is paid before rolling over or paying out lump sums.|
|7.||Ensure all prior year financial statements, tax returns and other tax and compliance obligations have been finalised.|
Pay out lump sums to members who prefer this option and can meet a condition of release, or roll over the funds to another complying superannuation fund, such as a retail fund or industry fund. Two ATO forms generally need to be completed if there is a rollover - and others may be applicable depending on circumstances:
|9.||Arrange for a final audit and completion of the final SMSF annual return - specifying within the return that the fund is being wound up. All tax and reporting obligations must have been met at the time the SMSF is wound up and you should wait until your SMSF has no remaining assets or liabilities before lodging the final return.|
|10.||If all processes have been carried out correctly, you should receive a letter from the ATO confirming that your SMSF has been would up - stating that they have cancelled the fund's ABN and SMSF record.|
|11.||Following the winding up of your SMSF, bank accounts can then be closed unless there are post closure costs to be paid or the fund was scheduled to receive a refund.|
|12.||Determine which records need to be retained - such as payment statements and rollover documentation - and for how long. Many records will need to be retained for at least five years.|
Note that winding up an SMSF is a common event, part of the "life cycle", and is currently happening almost as frequently as individual fund establishments - as illustrated in the chart below - so include it in your costs and considerations. For further information, also review the ATO website and if you would like arrange professional advice and assistance with respect to winding up an SMSF please use the Inquiry button below.
If you would like to arrange professional advice in relation to the above matters, please complete the Inquiry form below providing details and you will be contacted accordingly. You will receive a fee quotation in advance of any advice or services being provided.