27 November 2018
By Colin Lewis,
Head of Technical Services,
Fitzpatricks Private Wealth
Are you considering winding-up your SMSF?
You may now be retired and wish to kick back with your super pension. Life is to be enjoyed and you don’t want the burden of running your own fund.
Maybe you’re moving overseas and because of issues with the “central management and control” of your fund and inability to contribute, you’ve decided it’s no longer appropriate.
You may have complex estate planning needs and are concerned with your fund delivering the right outcome. Without careful planning and execution there’s the risk that control of your fund when you die could end up in the wrong hands resulting in your entitlements going to the wrong person(s) with intended beneficiaries being bitterly disappointed. Unintended consequences can and do happen. This is not saying other funds don’t have problems, they do, but some issues are peculiar to SMSFs that may not otherwise happen.
There are excellent reasons for running your own fund. Generally, it should be about what other funds can’t offer. For example, mainstream funds cannot deal with direct property, so this asset class is the domain of SMSFs.
However, for those who didn’t have a “unique” reason for setting up their SMSF other than for “control”, the time may come when they’ve had enough. It may be that the benefits are no longer there, the attraction has worn off, or it’s got too hard.
Do your savings even need to be in super come retirement? Too many SMSFs have low balances. Why incur fees running a super fund for the privilege of a tax-free retirement when this could possibly be achieved investing outside super given the amount that can be earnt tax-free, $32,279 (single) and $28,974 (couple each) with the Seniors and Pensioners Tax Offset.
If you no longer want the responsibility of managing your own SMSF, or you’re no longer able to, e.g. you’re bankrupt and thus cannot be a trustee (or director of a corporate trustee)/member – then you need to consider your options.
If you want your own fund but wish to relinquish responsibility you could make it a small APRA fund and appoint an approved trustee. This may allow you to keep the same investments. However, the trustee will charge a fee and may limit investment flexibility.
If you’re winding-up your SMSF you have two options. One, transfer to another complying fund, or two, take your money and invest outside super provided you’ve met a condition of release (COR).
But it may have implications including:
- capital gains tax (CGT) and stamp duty liabilities from the disposal of certain assets
- insurance policies cease
- assets unable to be transferred – e.g. “frozen assets”, real property or collectables – need to be sold or taken as a benefit payment provided a COR is met
- fund reserves allocated to members impact their contribution caps
- you’ll need to make new death benefit nominations and wills may need to be updated
- reassessment by Centrelink and possible reduction in benefits resulting from the rollover of account-based pensions
- potential loss of Centrelink’s favourable assets test treatment afforded to complying pensions
Winding-up is time consuming and will not happen overnight – be prepared for delays.
So, what’s the process?
First, check the fund’s trust deed to determine if there’s any specific procedure to be followed and hold a trustee meeting to discuss, approve and minute winding-up.
Calculate outstanding expenses, tax and refunds
As the costs of administration and winding-up are first priority, you must provide for:
- accounting, audit, actuarial, legal, and administration fees for work done and still to be done
- current and estimated future tax liabilities, including CGT on disposal of assets
You should ensure receipt of, and record, outstanding income including the refund of excess franking credits.
Dispose of assets and calculate member entitlements
You may need to sell assets. All transactions must be done on an arm’s-length basis – commercial terms at market values. The proceeds determine your entitlements (after fees and taxes) and a reconciliation of member balances to net fund assets should be made.
Selling assets or an in-specie payment to another fund or yourself is a CGT event and must be accounted for in the final return.
An actuary may need to calculate the fund’s exempt current pension income and commutation value of any defined benefit pension.
Benefits may be paid as cash or as an in-specie transfer where allowed and possible.
Before transferring benefits, ensure that members wishing to claim a tax deduction for any contributions complete a “notice of intent” and the trustee acknowledges these requests.
Provide written details of the fund to which you want your benefits transferred. Alternatively, if you’ve met a COR, you may cash-out your benefits.
If you’re running a pension, ensure the pro-rated minimum pension amount is paid and tax is withheld from payments, if relevant.
You’re still entitled to any amounts received by the fund after a benefit payment and they must be accounted for.
Pay outstanding expenses and tax
For simplicity, amounts for outstanding expenses and tax could be held in a non-interest bearing account to avoid the need to distribute income, account for tax and do an annual return. A second benefit payment may be required to clear any remaining funds if expenses have been over-provided for, or if there’s further amounts received such as excess franking credits.
Complete final accounts and annual return
Ensure all tax and reporting obligations have been met at the time your SMSF is wound-up, including:
- lodging the fund’s final annual return once the final audit is completed
- TBAR for members with retirement phase income streams
- PAYG summaries for members under age 60 receiving a pension
- issuing benefit payment summaries where benefits have been paid to members
- meeting any outstanding tax obligations and the Australian Taxation Office (ATO) supervisory levy
You should wait until your SMSF has no assets and liabilities before lodging the final returns.
Notify the regulator and members
The ATO must be notified within 28 days of the fund winding-up. Also, members must be notified, but this will have been met at the trustee meeting.
Following wind-up, bank accounts can be closed and if there’s a corporate trustee it may have to be deregistered.
Finally, wait for the ATO to confirm that it has cancelled the fund’s ABN. And remember – while you may no longer have a SMSF, you must still keep the fund records for up to 10 years!