Author: Emma Partenza, Manager, TAG Financial Service
SMSF Wind Up Series
Part 1 – When to Wind Up a SMSF
In this multi part series, I will be exploring:
- the circumstances where a SMSF should be considered for wind up,
- the process of winding up a SMSF and
- issues that need to be considered during this process.
The Number of Wind Ups
According to ATO statistics, from 2016-17 financial year through to 2020-21 there were on average, 18,000 SMSFs that have been wound up each year. Interestingly, wind ups last financial year were at an all-time low:
Source: ATO Self Managed Superannuation Funds – Dataset – data.gov.au
Trustees should carefully consider whether winding up a SMSF is the right decision for the members.
The Reasons for Wind Ups
Trustees may decide to wind up their SMSF because of changes in their personal circumstances. Here are a number of common ones:
- Death of a member/(s)
With the introduction of the transfer balance cap (TBC), cashing of death benefits may require the deceased’s benefits to be paid out of the SMSF (either fully or in part) to comply with the TBC for the surviving spouse. Where the surviving spouse has died, all remaining benefits now must pass through to other beneficiaries and leave the SMSF under compulsory cashing requirements.
- Nil benefits remain
Due to members rolling out of an SMSF to an industry/retail fund or the cashing of death benefits.
SMSF annual returns cannot be lodged for a continuing SMSF that does not have any assets (except for the wind up year).
- Member’s needs and requirements have changed
This may be due to their age, living costs and requirements (including aged care requirements), receipt of Centrelink benefits or personal investment income position has changed.
- Incapacity of trustee
Failing health that can lead to diagnoses of dementia/Alzheimer’s would cause a trustee to become incapacitated and unable to remain as a trustee/director of the SMSF (please note they can remain a member in this instance). The incapacitated trustee’s Enduring Power of Attorney (EPOA) may be appointed in their stead, in accordance with the trust deed. However, where there was no EPOA in place, this can lead to disastrous consequences for the fund in removing said trustee. APRA would become involved, and it becomes a costly exercise to re-structure the SMSF to satisfy SIS requirements.
- Relationship breakdowns of members in SMSF
Court orders required to divide up SMSF benefits between parties and potential depletion of benefits remaining in the fund due to one party being required to leave the SMSF.
- Limited benefits don’t warrant the costs remain
There may come a time where the benefit remaining is minimal and does not justify the the costs associated with running a SMSF. Investing remaining assets outside an SMSF may achieve the same tax impost as the SMSF.
- Lack of time and/or expertise in running a SMSF
Investments and administration requirements are the ultimate responsibility of the trustee and trustees may no longer wish to actively manage the SMSF compliance obligations or investment responsibilities for members. Trustees should consider engaging a financial advisor who would look after the member’s benefits on their behalf should the benefit of keeping the members benefits in superannuation be valuable.
- Trustee disputes
Failure to comply with SIS
In some circumstances, winding up may be the trustee’s only option should they fail to comply with SIS, such as:
- The residency requirements will no longer be met
- Member became a disqualified person (including bankruptcy)
- Complying pensions became insolvent
- ATO issues a wind-up direction to the trustees
Any decision to be made in considering the potential wind up of a SMSF, professional advice should be obtained to determine that a wind up is in the best interests of members and seek possible alternatives.
Succession planning alternative
Other options may be available for trustees to consider to potentially avoid a wind up of a SMSF, and provide superannuation benefits to the next generation.
It may be in the family’s best interest to continue with the SMSF and pre-plan passing benefits down to the next generation. Proper planning and knowing the alternatives may provide a valuable estate planning tool.
Other considerations of winding up
Where the decision has been made to wind up a SMSF, the fund’s governing rules need to be reviewed and consulted to ascertain whether there are any other special requirements imposed on the trustee undertaking this process, to ensure the wind up occurs in accordance with the fund’s deed.
It is important to note that where trustees decide that a wind up of a SMSF is best in the circumstances, all members of the SMSF must agree to wind it up. To ensure no complications are encountered in the wind up process each trustee and member should sign off on their agreement to wind up the fund. This way they have been properly informed.
What’s next?
In the next instalment, I will explore some tips and traps and issues to be aware of when considering the winding up an SMSF. It is very important a SMSF is wound up correctly.
Once a fund is wound up, it cannot be re-activated.
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Disclaimer: The information contained is general in nature. Professional advice should be sought before acting on any aspect on this page. Financial planning services provided by TAG Financial Advisors Pty Ltd (ABN 77 154 205 017 AFSL 415632), a wholly owned subsidiary of TAG Financial Services Pty Ltd (ABN 67 075 374 686). Copyright 2022. Please do not reproduce without the expressed written consent of the author.