Every year almost as many SMSFs are wound up as they are established. The decision to wind up a fund should not be taken lightly, as once a fund is wound up there is no turning back. Winding up an SMSF is in many instances a far bigger decision than establishing one because you are no longer dealing with a blank canvas and are now left with the likelihood of deconstructing many years of work.
One of the most important elements of winding up a fund, regardless of where you sit in the superannuation lifecycle is time. This means you need to have options with regards to all the moving parts associated with being a superannuation member whilst you start and work through the process of winding up.
What is critical in this and all decisions you are faced with is the question: What are you doing with your superannuation benefits? If you’re still accumulating super and are unable to access your benefits, then you need to contemplate where future contributions are going to be paid to. If you receive employer contributions, do you want to continue to receive contributions in the SMSF right up until its final days or do you want to have your contributions directed to your new superannuation fund as early as possible? With contributions, the earlier they are redirected the greater chance of minimising the risk of last-minute amounts resulting in recalculations of taxation liabilities for the fund and also it gives your employer time to adjust, the last thing you want is for your employer to make a contribution in July to a fund that has been wound up in June.
At the other end of the lifecycle, if you are receiving a pension then you may want to continue to make pension payments from your SMSF for as long as possible to ensure your fund retains access to its exempt pension income deduction. This will be useful as you sell down assets to liquidate your member balance as it will provide a taxation benefit that would not otherwise be afforded if you elect to stop your pension early. Of course, this issue, about when to stop your pension and when to sell the assets, is also relevant if you are rolling your pension to another fund, in these instances it is best to receive appropriate tax advice about your fund and financial advice about any fund you may be seeking to rollover to. It’s also important that you pay the minimum pension for the year, including a pro-rata amount if the pension ceases on a date other than 30 June.
To execute a rollover, you must first commute (stop) the pension, roll it over and recommence it in the new fund. Some funds will allow you to transfer the assets from your SMSF to their product via an in-specie transfer. If all the assets are transferred in one hit, from an SMSF perspective it may be determined that your pension has ceased immediately before those assets are transferred resulting in a potential Capital Gains Tax liability on the sale. It may be a better option to progressively sell assets whilst entitled to the pension exemption and then rollover cash. Everyone’s fund is going to be different so again it’s important to get the right advice. The other key issue with pensions is the reporting for Transfer Balance Account purposes. If you transfer to a larger fund they will report any new pension immediately whereas your SMSF may lag in its reporting of the pension commutation. This could lead to an excess transfer balance cap assessment which is preferably avoided. Make sure your SMSF reports early.
Possibly the most significant reason why time is your most valued possession with regards to the wind-up process is the investments of the SMSF. If you attempt to rush the wind-up process and you have a significant pool of assets, chances are you will run into problems. Trying to wind up a fund in June that holds Managed Funds during that last quarter of the year may mean you’ve got to take into consideration the distributions that are likely to hit in July or perhaps August plus wait for the tax statements. If you allow yourself more time then you can identify income patterns and more accurately reflect the member balance to be rolled over. Also, are there any assets you are wanting to retain? If the answer is yes how will you achieve that, will you acquire the assets from the fund (at market value) or are you entitled to a benefit payment so will in-specie transfer the assets. Make sure the ownership reflects the actual owner and that the valuations reflect arm’s length transactions.
If of course, you are winding up your fund to pay a final benefit out to yourself and/or other members, then the timing is less of an issue but you still want to get your calculations right and have satisfied the appropriate condition of release to be able to fully access your benefits. You also want to get the timing right so you can avoid unnecessary administration fees by crossing financial years.
As a final point, make a list of all the administrative things that need to be done. Notify the ATO, wind up the Corporate Trustee if you have no further use for the trustee company, cancel any insurance and buy a nice box to store all your records in for the next 5 to 10 years as your responsibilities don’t end on the day you wind-up the fund.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
