Paul Rafton, National Lead Partner in Superannuation at BDO, discusses how to wind-up a Self-Managed Superannuation Fund. Paul gave a presentation on this topic for Legalwise Seminars. To hear more about SMSFs, BDO Superannuation Partner Mark Wilkinson will present on the topic, Structuring Superannuation Contributions Over a Lifetime at the SMSF Symposium: Opportunities and Threats on 17 June.
A Self-Managed Superannuation Fund (SMSF) can reap benefits for its members, but as life circumstances change, there may come a time when a SMSF needs to be wound up. Examples include as a result of divorce, lack of capacity or death. To help guide your path, let’s examine six common scenarios of when it may be time to exit a SMSF. But first, let’s briefly revisit what a SMSF is and why someone would establish one.
What is a SMSF?
The overarching premise for superannuation in Australia is set out in section 62 of the Superannuation Industry (Supervision) Act, known as the Sole Purpose Test. In summary, each trustee of a regulated superannuation fund must ensure the fund is maintained solely for:
- “The provision of benefits for each member of the fund on or after the member’s retirement, or
- The provision of benefits in respect of each member of the fund on or after the member’s death.”
The following objectives of Australia’s superannuation system were enshrined in legislation in 2017:
“The primary objective of the superannuation system is to provide income in retirement to substitute or supplement the age pension.”
Why would someone establish a DIY super fund or SMSF?
There are many reasons why someone would establish a SMSF, such as flexibility and control over the investment approach, and a belief by members and trustees that they can do better than traditional industry or retail super funds in terms of performance.
The ATO suggests the minimum fund balance for a SMSF to be cost effective is in the vicinity of $500,000.
Once the decision has been made to establish a SMSF, its members and trustee must give an undertaking to:
- Act honestly in all matters concerning the fund
- Exercise skill, care and diligence in managing the fund
- Act in the best interests of all the members of the fund
- Ensure members only access benefits if they have met a legitimate condition of release
- Don’t enter transactions that circumvent restrictions on the payment of benefits
- Ensure personal and other assets are kept separate from assets of the fund
- Take appropriate action to protect the fund’s assets
- Properly exercise powers as a trustee or director of the corporate trustee of the fund
- Allow all members of the fund to have access to information and documents as required, including details about the financial situation and investments of the fund, and the members’ benefit entitlements.
Why would someone exit a SMSF?
As outlined earlier, there are many reasons for exiting a SMSF. These include:
- No balance/members left
- The SMSF’s asset size makes it no longer cost effective
- A SMSF no longer suits the person’s investment preferences
- Relationship breakdown
- One surviving spouse
- Trustee is disqualified under the Superannuation Industry (Supervision) Act
- ATO enforceable undertaking
- Solvency issues
Basic steps to wind up a SMSF
When winding up a SMSF, it is important to carefully plan the approach to closure and ensure all necessary steps are taken to avoid compliance and/or administration issues.
Before you start the process
- Check the trust deed for any wind up instructions
- Document the decision to wind up the SMSF
- Select a wind up date
Undertake the wind up process
- Complete interim accounts to the nominated wind up date
- Sell all assets (even if rollover in specie – it is a “disposal”)
- Record all income
- Accrue any expenses for wind up (e.g. accounting/audit fees)
- Rollover/payout assets (e.g. up to 80% of the total value of assets)
- Prepare the final income tax return
- Arrange an audit
- Pay any outstanding tax and debts before closing the bank account
- Payout or rollover final member account balances.
- Close the bank account. The auditor may want to see a closed bank account before signing off
- Have financial reports and the income tax return signed by the fund’s trustees
- Lodge the income tax return (use a paper return if mid-year)
- Notify the ATO within 28 days of winding up the fund
- Cancel the associated ABN and/or TFN
- Deregister the Corporate Trustee (if applicable)
- Retain fund records (at least 5 years).
What if the SMSF is due a tax refund?
Where the fund is expecting an income tax refund, the ATO’s guidance is to keep the bank account open (with minimal balance) until the tax refund has been received. If owed a refund it is important to note that this could cause delays in preparation of final financials, and consideration must be given to this additional income (and whether interest will accrue).
By following this process trustees can be assured a smooth wind down process. If you or a client of yours is considering winding up a SMSF, contact a BDO adviser to learn more about the process and compliance obligations.
Paul Rafton is a National Lead Partner in Superannuation at BDO. He is a specialist in SMSFs, advising clients on compliance issues and techniques to enhance and protect their retirement savings. He has worked across superannuation fund compliance and administration and provides advice on the interpretation of related legislation. Paul joined BDO, as executive director, in 2006. In 2014, he was appointed partner. Paul has over 27 years’ experience in accounting and superannuation fund compliance and administration. His services include: SMSF administration, compliance and advisory, Superannuation fund audit and APRA Registrable Superannuation Entities (RSE). Paul’s key assignments include: Fund Administration – Compliance and administration of up to 500 SMSFs; Audit – Financial and compliance audit of SMSFs; APRA RSE – After consulting extensively with key stakeholders and undertaking a high-level due diligence review, a risk management strategy and risk management plan were designed and implemented to set out the organisational structure and risk management framework and articulate those particular risks to the Trustee, processes and procedures were subsequently implemented to mitigate the identified risks; and APRA RSE – Design of product disclosure statement and annual report to comply with both APRA and ASIC reporting guidelines. Paul holds a Bachelor of Commerce (Accountancy). Contact Paul at [email protected] or connect via LinkedIn .