How to wind up an SMSF
Everything an SMSF trustee should know about compliance.
Like most things, self-managed superannuation funds are not meant to last forever. At some point they will need to be wound up. It could be as a result of the death of a member or because the administration fees outweigh the benefits.
The Australian Taxation Office has produced an information sheet in winding up an SMSF, however one important step not covered is the selling of the investments of the fund.
Where an SMSF has investments with large unrealised gains they should be sold while the fund is still in pension phase. If this occurs in accumulation phase the fund will have to pay 10 per cent income tax on the gains made.
The ATO information sheet contains a table that details what trustees must and must not do when winding up a fund. But this table could cause problems for some trustees. The first step shown is for trustees to read the SMSF's trust deed. This is because in most cases the trust deed will set out the process and documentation required for winding up the fund.
One of the most important steps on the ATO list is a warning for trustees to make sure they deal with member's assets and contributions correctly. If a member has preserved benefits, and they have not met a condition of release, they must be rolled into another super fund and not paid to them.
After this warning in the list, trustees should not follow the steps in order. Those steps are to
have an audit conducted of the fund,
prepare the final tax return for the fund, and then
notify the ATO in writing within 28 days that the fund has been wound up.
Before the audit can be conducted a set of financial statements must be prepared for the fund. It is these accounts that will show how much each member must either be paid or the value of the benefit to be rolled into another super fund.
In addition, as most funds would be wound up during a financial year, it is impossible for trustees to lodge the tax return first and then notify the ATO of it being wound up. This is because the final tax return cannot be lodged until after the end of the financial year it was wound up. This means in practical terms the ATO must be notified in writing first of the windup and then the final tax return must be lodged.
The final point on the ATO don't list is a warning that the bank account should not be closed until after the final tax return is lodged and the assessment issues. As the tax return will not be lodged until after the end of the tax year, and because these accounts in most cases earn interest, the fund will have earned income in the financial year after it was wound up and it would need to lodge another tax return.
A solution to this problem is for the trustees to obtain firm quotes for the cost of preparing the final accounts and audit of the fund and pre-pay these amounts. The accountant for the fund should also be able to accurately estimate how much tax and fees will be payable and these can also be pre-paid.
After all of these payments, and the final payments to members, the account can then be closed. If the final tax return results in a refund it can be deposited in the accountant's trust bank account to pay their fee.
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