There are a lot of reasons why trustees might choose to wind-up their SMSF from performance to a change in circumstances. We look at the rationale and some of the considerations on winding-up.
Last financial year, over 10,000 Self-Managed Superannuation Funds (SMSF) wound up – with the peak of wind-ups occurring in June each year.
Common reasons include:
Divorce
Many SMSFs are wound up because of a life event. In a divorce, special rules exist to ensure that the interests of the members are not detrimentally impacted and can be rolled into alternative funds without tax consequences. Assuming the divorcing members don’t want to continue in a fund together, the fund is either wound-up or one member exits the fund.
Death
On the death of a member, the surviving member or members might decide to wind-up the fund once the death benefit has been paid out. It’s not compulsory to close the fund. For two member funds, the remaining member will need to decide whether to wind-up the fund or appoint a new trustee to ensure that the fund can continue to meet its legal requirements. Trustees have a grace period of 6 months to wind-up or appoint a new member.
Performance
Personally managing superannuation assets does not always produce the result that trustees expect. In 2021-22, SMSFs outperformed APRA regulated funds by over 4%, predominantly because of the exposure of APRA funds to international equities in a particularly volatile period. If performance is consistently below expectations, it’s important to consider whether your SMSF is the best vehicle for your retirement savings.
Director of a corporate trustee does not hold a director ID
Directors of a corporate trustee must hold a Director ID. Given that all members of an SMSF with a corporate trustee are required to be directors, its essential that all members have met this requirement.
Bankruptcy or criminal conviction
You cannot be a trustee or a director of an SMSF if you are bankrupt, insolvent under administration, or convicted of a criminal offence relating to dishonesty.
Members moving overseas
SMSFs are required to meet the residency tests. Amongst other things, the tests require that central management and control of the fund is ordinarily in Australia, and where the fund is accepting contributions from members, at least 50% of the fund’s superannuation interests are held by Australian resident members. If a fund member is planning on being overseas for 2 years or more, it’s essential to assess the viability of the SMSF. If the fund needs to be wound up, this should be done before the member leaves Australia.
Steps to winding-up an SMSF
Refer to the Trust Deed.
The trust deed and super laws together form the fund’s governing rules. It’s important to refer to the trust deed for specific guidance on the procedures and documentation required to wind-up the SMSF. Any decisions by the trustees should be minuted.
Liquidate the assets.
The member balances need to be paid out of the fund and you should seek assistance with this to ensure this process is managed correctly. In some circumstances, the members might take an asset, such as a property, as an in-specie lump sum payment or in-specie rollover at market value to another super fund. Unless an in-specie rollover is a result of a marriage breakdown, the transfer out of an asset might trigger capital gains tax (CGT). Seek specialist taxation advice first.
Payout/rollover member benefits.
The trustees must ensure that member benefits are managed according to the superannuation laws and the trust deed, and the fund has no assets left once it has been wound up. To wind-up an SMSF and pay benefits to a member, the member must meet a condition of release allowing them to access their benefits. If the member does not meet a condition of release or does not want to access their benefits when the fund winds-up, then their balance will need to roll over to another complying super fund. There may be CGT implications for the SMSF on the disposal of assets to enable the payment of benefits or the rollover of benefits to another fund. Any rollovers from an SMSF must be processed through SuperStream.
Audit the SMSF.
When winding up an SMSF, the final step prior to lodgement of the tax return is for an SMSF auditor to undertake the final audit.
Lodge final tax return and settle taxation obligations.
Once the final audit is signed off, the trustees can organise lodgement of the final tax return and make/receive any outstanding tax obligations. When completing the final return, it will need to specify that it is the final return for this SMSF.
Close the SMSF bank account.
Once all expected liabilities and expenses are paid, any final refunds have been received, rollovers via SuperStream completed, and confirmation from the ATO that the fund has been wound up, the bank account can be closed. Any remaining balances can either be paid out as a rollover (if the member has not met a condition of release) or a lump sum withdrawal/pension payment.
If transactions occur that do not relate to the winding up process after the end of the financial year, then completion of the wind-up could be delayed until the following financial year as the SMSF is still trading.
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