How to shut down your SMSF
- As you age, an SMSF may become too expensive or simply too much trouble
- We explain the process of winding up a fund
- Doing it yourself can save you $2,000 to $5,000
Every self-managed super fund comes with a ‘use by’ date. Some people decide early on that the running costs or commitment required simply aren’t worth it. Others find the benefits of having an SMSF diminish as they age. For instance, a declining balance – courtesy of the forced minimum withdrawals – can make the fund uneconomic.
Unfortunately, winding up your SMSF can be more complex and expensive than starting it up. We’ll try to simplify the process.
To wind up your SMSF you’ll need to liquidate (sell) all the fund’s assets and either transfer the balance to another super fund or distribute it to the SMSF members (or their beneficiaries).
Everything must be done by the book, carefully and methodically. If you overlook one particular asset and your fund remains open, you’ll be exposing yourself to additional costs for financial statements, audits and tax returns.
And if you’re on the age pension, shutting down your current fund (and account based pensionThe 'usual' superannuation pension you receive on retirement. Your account contains an amount from which you can make withdrawals (subject to set minimums). These withdrawals (the pension) are generally tax-free for those over 60.) will cost you the grandfathering from the deeming rules that came in on 1 January 2015 (see Age pension: Keeping your super pension grandfathered). So make sure you factor in any loss of age pension or Commonwealth Seniors Health Card if you’re contemplating winding up your fund.
The trust deed
Start the wind up process by reviewing your trust deed. This will specify what needs to happen to wind up the fund, although in some cases it may be silent.
If the deed contains winding up requirements you’ll need to make sure you follow them (as well as all the legal requirements – see below). Good deeds will have simple requirements and allow the trustees maximum flexibility.
The next step is to get the agreement of all parties, meaning the trustees (or, in the case of a corporate trustee, the directors) and each of the members. All should sign a resolution documenting the decision to close the fund with wording along the lines set out below:
’The trustee(s) and members(s) have decided to close the XYZ Superannuation Fund on [DATE] for the following reason(s):
1. Low values mean the fund is not cost effective
2. In view of health issues it is more appropriate to transfer to a retail fund
The trustees and members having agreed to the above resolution will inform the accountant/administrator to process the winding up of the fund’
The trustees must also give notice to each contributing employer and member that the fund is to be wound up on the specified date.
Sale of assets
Once it’s been agreed to wind up the fund, the trustees can begin the process of selling any non-cash assets. The earlier you do this, the sooner you can complete your final tax return (more below). Note though, if you’re transferring to another fund you’ll have 100% cash exposure (assuming you have no investments outside of super) from when the assets are sold until the transfer to the new fund is complete.
We recommend seeking personal advice on strategies to mitigate this risk. For instance, you could buy exchange traded funds or use derivatives outside of super, or you could break the transfer into multiple units to ensure at least part of your overall super balance is invested in risk assets at all times.
If your fund isn’t in pension mode and you have unrealised gains on your investments, note that the sale of assets may trigger a capital gains taxCapital gains tax (CGT) is the tax payable on capital gains. Where assets are held 12 months or more, individuals are entitled to a 50% discount when calculating the taxable amount of a capital gain. Super funds are entitled to a 33.33% discount. Where assets are held less than 12 months, capital gains are taxed at normal rates. Note also that some assets are exempt from CGT. liability.
Finally, if you’re paying benefits to members – or transferring to certain super funds – it’s possible to do an in-specieA transfer of an asset to satisfy an obligation. In-specie transfers are used as an alternative to selling the asset and paying cash from the proceeds. transfer of the fund’s assets. You will need to complete an ’off-market transfer form’ if you’re paying the benefit out to a member as a lump sum. If you’re transferring to another fund that allows in-specieA transfer of an asset to satisfy an obligation. In-specie transfers are used as an alternative to selling the asset and paying cash from the proceeds. transfers, you’ll need to follow their instructions.
Action point: When calculating the amount available to pay out or transfer on winding up your SMSF, remember the current value of many assets is likely to be below the value at the last financial year end (30 June 2015).
Specify where funds are to be paid
Each fund member also needs to tell the trustees (in writing) how and where they’d like their benefits paid. The member should specify whether they want their benefits rolled over to another fund – in which case they should identify the fund – or paid out as a lump sum.
Liam typically advises his clients to use the Tax Office’s form Rollover initiation request to transfer whole balance of superannuation benefits between funds (NAT 71223) when benefits are being rolled over. But members can simply write a letter (using that form as a guide to the information to provide the fund) if they so choose.
If a member is requesting a lump sum, they should write a letter stating this and the ‘condition of release’ that has been met.
Prior year’s compliance
Once the above paperwork is in place (and, if relevant, while assets are being sold) you should ensure that all of the prior year’s financial statements, tax returns and any other compliance obligations have been completed.
Paying out the funds
Having completed those steps, you’re ready to transfer the members’ balances or pay out benefits, ensuring you comply with the fund’s trust deed and the SIS ActThe Superannuation Industry (Supervision) Act 1993. It is the main piece of law governing the operation of superannuation funds (including SMSFs). in the process.
To pay out lump sum benefits to members, they must have met a condition of release. If that’s not the case the balance will need to be transferred (rolled over) to another complying super fund.
If you’re rolling over benefits there are two ATO forms to complete:
- Rollover initiation request to transfer whole balance of superannuation benefits between funds (NAT 71223). Fund members should use this to request the transfer of their super to another fund. It includes some compulsory information, which is why we suggest members use it to instruct the trustees.
- Rollover benefits statement (NAT 70944). Trustees should complete this form, sending the complete statement to the receiving fund within seven days of paying the rollover. They should also provide a copy of the statement to the member within 30 days of paying the rollover and keep a copy of the statement for a period of five years.
Where members have received a lump sum benefit payment, the trustees need to complete the form ETP payment summary – superannuation fund (NAT 70947). If a pension payment was made prior to closure and tax withheld, you’ll also need to complete PAYG payment summary – superannuation income stream (NAT 70987).
Remember to retain enough cash in the fund to pay any outstanding and post-wind up expenses, including tax, professional fees and lodgement fees. Once the bills are paid, any remaining cash can be rolled over to the member’s new accounts or paid out as a lump sum if a condition of release has been met.
Action point: Remember that roll-overs can’t be ‘added’ to another pension account; the funds need to be transferred to an accumulation account. Then a second pension can be started, or the existing pension can be ceased, consolidated with the new accumulation balance and a new pension commenced.
Final audit and return
Okay, you’re getting there; just a few more steps to go. To close the fund you’ll need to arrange a final audit and lodge a final tax return, ensuring you complete the section that indicates that the fund is being wound up. At this time you should also pay any outstanding tax liabilities.
Assuming it’s been done correctly, the Tax Office will send you a letter stating that they have cancelled your fund’s ABN and closed its records on their system.
Closing the bank account
After (and only after) receiving the Tax Office confirmation letter, you should close your fund’s bank account. In some cases, the SMSF will be due a refund after lodging the final tax return. If that’s the case, leave the bank account open until the refund is received.
Post wind up expenses
Ideally, all bills will be paid before the date you want the fund wound up. But if you can’t achieve that, it’s possible to have some of the fund’s money retained on trust by the former SMSF trustee(s) to discharge any outstanding liabilities. We recommend getting personal advice on implementing and documenting this.
If your fund has a corporate trustee and it’s not needed for other purposes, it will also need to be closed down (deregistered). Failing to do this means it’s still on the hook for annual fees and will need to keep on lodging annual documents.
The simplest approach is to apply to ASIC for a voluntary deregistration of the company. In order to do this:
- all members of the company need to agree to deregister
- the company can’t be carrying on business
- there must be less than $1,000 of assets in the company and no outstanding liabilities
- the company can’t be party to any legal proceedings
- all fees and penalties payable under the Corporations Act 2001 must have been paid.
If these requirements are met, complete the Application for voluntary deregistration of a company (ASIC Form 6010) and pay the $38 lodgement fee. ASIC will tell if your application is approved and then publish a notice of proposed deregistration in the Government Gazette. Two months after publication (assuming no-one requests a deferral or cancellation) the company will be deregistered.
Most people should be able to use this approach, but if not you’ll need to do a members’ voluntary winding up, in which case we suggest consulting your adviser, accountant or lawyer.
If you have an estate planning strategy in place it’s likely to be affected by the closure of your SMSF. So you’ll need to seek personal advice on the necessary steps to replicate the strategy.
Where an SMSF is being closed due to trustee poor health, keep in mind that many industry and retail funds will not allow an attorney acting under an Enduring Power of AttorneyAn EPOA is a legal agreement that allows someone to appoint another person to make financial and property decisions on their behalf. Unlike an ordinary power of attorney, an EPOA continues to operate even if the donor (the person who granted it) loses legal capacity (for instance, becomes mentally ill). (EPOA) to implement a Binding Death Benefit NominationAlso known as a BDBN. A BDBN is a document given by a super fund member to the super fund trustee. A valid BDBN legally compels the trustee to pay death benefits as directed by the member.. If this impacts you, you’ll need to seek legal advice on an alternative strategy.
In a nutshell
Closing a fund is a time consuming but relatively straightforward process. Most complications are likely to arise around the sale of assets, which is why you should seek personal advice on the tax and other aspects of the asset disposals.
If you don’t want to run the process yourself, your administrator, or a good adviser or accountant should be able to do it for you. Unfortunately, it’s not cheap because of the amount of paperwork involved. Expect to pay around $2,000 to $5,000, depending on the complexity of your fund and its arrangements.
Liam Shorte is a principal of Verante Financial Planning Pty Ltd (www.verante.com.au), a corporate authorised representative of Magnitude Group Pty Ltd (AFSL 221557). This article is a general information article and to the extent it contains any financial advice it is general advice only. We recommend seeking personal advice on your own circumstances.
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