Having an SMSF can be a lifetime or a lifestyle decision. But the time will arrive when you may decide to wind it up. Winding up may be due to a member’s death, loss of legal capacity or the fund has served its useful life and run out of money.
In some situations, one option could be to keep the fund going by appointing someone who has an enduring power of attorney or getting your legal personal representative to be trustee. This may come in handy if you are going overseas, have lost legal capacity or unable to be trustee of the fund for a number of reasons.
However, if you are bankrupt you won’t be able to have your legal personal representative be trustee in your place and may need to rollover your benefit to another fund.
The options
If you want to keep the SMSF but wish to relinquish the trustee responsibilities, you could convert it to a small APRA fund (SAF), which has a regulator-approved trustee.
A SAF is regulated by the Australian Prudential Regulation Authority, rather than the Australian Tax Office, which regulates SMSFs. This may allow you to keep the same investments, without the responsibility. The SAF trustee will charge a fee to look after the fund and restrictions may be placed on investment flexibility.
There are at least two options available when winding up your SMSF, depending on your reasons for doing so. The first is that it is possible for your super balance to be transferred to another complying super fund, such as a retail fund, industry fund or SAF. The second is to take your super money, provided it can be paid to you, and invest outside super.
Winding up your SMSF may have implications, such as capital gains tax (CGT), stamp duty due to disposal of certain assets and the cessation of insurance policies held by the fund. A change in control of the fund may mean you’ll need to review your personal circumstances, such as death benefit nominations and your will.
There may be some assets that need to be sold as part of the wind up. This is because it may not be possible to transfer the assets to another fund or the members/beneficiaries may require their payment in cash. Also, it may not be possible to dispose or transfer some assets, such as “frozen assets” because of restrictions on their sale or purchase and they may need to be sold, or taken as a benefit payment, provided the fund rules allow payment.
If the fund has built up investment reserves, it may be possible to transfer the reserves to members’ accounts. Any allocation from a reserve, plus other contribution for a member in the financial year in excess of a member’s contribution caps, may attract a tax penalty.
From a Centrelink point of view, a reassessment for social security purposes may be required. This could result in a reduction of benefits and a potential loss of Centrelink’s favourable assets test treatment.
Now we’ve had a look at the possible reasons for winding up an SMSF, as well as some of the implications of winding up, it is always valuable to have a checklist, so you will cover the most important things. Here is a list of things that need to be done as part of the windup of an SMSF.
The Checklist
1. Trust deed
- Have you checked the fund’s trust deed to see what it says about winding up?
- Did you consult the fund’s trust deed for any specific procedures to wind up the fund?
- Does the trust deed have any provisions that must be followed for holding a trustee meeting to discuss, approve and minute the winding up?
2. Trustee
- Have you convened a trustee meeting to wind up the fund?
- Have members been notified of the wind up of the fund?
3. Member entitlements
- Have you received a written request from a member requesting the transfer of entitlements to another fund or paid to the member or beneficiaries?
- Have you calculated members’ entitlements after considering any expenses payable by the fund?
- If a defined benefit pension is being paid by the fund has the fund’s actuary calculated the commutation value?
- Has the pro-rated minimum pension amount been calculated and paid before being rolled over or cashing out?
4. Expenses, taxes and refunds
- Have you made provision for any expenses and liabilities, such as accounting, audit, actuarial, legal, and administration fees for work done and still to be done for the fund, including any current and estimated future tax liabilities, including CGT on the disposal or transfer of fund assets?
- Have you calculated any outstanding expenses, taxes and refunds?
- Have you receipted and recorded, any outstanding income, including any refund of excess franking credits?
- Have outstanding expenses and tax been paid?
- Has tax been withheld from payments and reported to the ATO, if relevant?
- Have PAYG summaries been completed if required?
5. Disposal of fund assets
- Have you disposed of fund assets as part of the wind up of the fund?
- If the disposal of the asset is to a related party has the transaction been on an arm’s commercial length basis?
- Have final accounts and the fund’s annual tax and compliance returns been completed and lodged?
6. Deregistration and notification to regulators and financial institution
- Has the trustee notified the ATO within 28 days of the fund winding up?
- Following the winding up of your SMSF, have the fund’s bank accounts been closed?
- If the fund has a corporate trustee does it require it to be de-registered?
- Has the ATO confirmed that the fund’s ABN has been cancelled?
7. Retention of fund records
- Are plans in place to retain fund records for the times required by the SIS Act and Regulations?
As you can see there are many moving parts to winding up an SMSF, which may be time consuming and take patience. Be prepared for delays in winding up the fund. The next step after all this is to put up the trustee boots and take a break.
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 regard to your circumstances.