One of the cardinal rules of investing is to have an exit strategy before you commit any capital. The same principle holds true for your self-managed super fund. To get the most out of your fund you need to prepare for a smooth exit from the outset.
The most common reasons for closing a SMSF are death, disability, divorce and moving overseas. If you are in pension phase you may have withdrawn all your savings, or you may simply have lost interest in running your own fund.
Whatever the reason, your fund needs to be wound up correctly or you could face ongoing fees for audits, financial statements and annual returns.
Having a clear exit strategy is especially important for couples where one person is the driving force behind the fund with a partner who is a passive member. If the more active member dies or becomes disabled, it can leave a burdensome responsibility for their partner at what is already a very difficult time.
Divorce does not necessarily trigger a wind-up, but may do without proper planning. The balance due to one partner can be paid into another super account or kept within the fund and paid out on retirement. But where assets need to be sold or transferred out of the fund there may be capital gains tax implications.
Similarly, the death of a member doesn’t automatically mean a fund must be closed. A SMSF can be used by up to four family members in perpetuity, with new individual trustees or directors of a corporate trustee.
The growing popularity of geared property strategies can also come unstuck if your SMSF needs to be wound up prematurely. This strategy is typically used to buy an investment property with a limited recourse loan which is paid off over time so the property can be sold tax-free in retirement.
But if you need to sell the property before reaching pension phase you will have to pay capital gains tax. Unwinding the trust that forms part of a limited recourse borrowing arrangement can also be costly and time-consuming, especially if it has to be handled by a less experienced trustee.
If the more active member dies or is disabled and unable to make contributions to repay the property loan, the fund could be at risk of a loan default and forced sale at a time that may not be advantageous.
The best way to avoid a forced sale is to have adequate insurance cover for death and disability. In the case of divorce, the borrowing arrangement can continue for one of the members provided it is properly structured at the outset. By using a corporate trustee the departing member can simply resign as a director.
Australians moving overseas can only access their super once they reach preservation age and retire. If you have your own SMSF and you leave Australia permanently you face the prospect of the Australian Taxation Office (ATO) ruling that your fund is non-complying. If this happens your fund will be taxed at 45 per cent.
Unless 50 per cent of your fund’s trustees are Australian residents your fund is likely to be found non-complying. To avoid punitive tax you can appoint a nominee with an enduring power of attorney to be a trustee on your behalf during your absence or close the fund and transfer your savings into an APRA fund.
People who believe they may relocate overseas temporarily or permanently should understand the regulations and plan accordingly.
When the decision is made to close your SMSF there are administrative steps that must be carefully managed and carried out in the right order to minimise costs and safeguard members’ benefits. The exact steps will depend on the circumstances of the wind-up, but the following is a general guide:
- Check the trust deed for any special requirements regarding the winding up of the fund.
- Obtain written agreement from all members to close the fund.
- Ask each member how and where they want their benefits paid. If a member has preserved benefits and has not met a condition of release such as retirement, they must be rolled over into another super fund.
- Value the fund’s assets and arrange for their transfer or disposal.
- Prepare draft financial statements to determine each member’s benefits.
- Arrange for a final audit and lodge a final annual return with the ATO.
- Notify the ATO in writing when the fund is closed.
- Once all fees are paid and any tax refund is received, close the fund’s bank account.
Wind-up costs vary widely, depending on your circumstances. Expect to pay a minimum of $1000 to close a fund with mostly cash investments and no outstanding tax issues. Costs are much higher for more complex investments, especially if capital gains tax is payable or actions are contested.
Sloppy record-keeping can lead to stamp duty and CGT headaches so it pays to be organised. Unlike income tax records, all records relating to super funds must be kept for at least 10 years.
Winding up a SMSF takes time and money. You owe it to yourself and your family to keep your records up-to-date. It may be worth seeking professional advice at the outset to ensure your fund is structured for an easy exit.