Although an SMSF can become a multi-generational retirement vehicle, I have observed situations where clients’ SMSFs have run their natural course. These include:
- All members have met a condition of release and the benefits have been paid out
- A member’s business and / or the SMSF-owned premises have been sold and the reason for an SMSF no longer exists
- All trustee-members have either died or left the fund
- The last remaining trustee is unable to continue
Therefore, I think it pays to have an exit plan for a time when an SMSF has served its purpose; or there are no available or capable trustees; or all member benefits have been exhausted.
Paying out a Retirement Benefit
If all the members have met conditions of release, it is possible to simply pay the member benefits and wind-up the SMSF, of course leaving sufficient money to pay all associated costs.
In the case that a member dies before drawing down his or her benefit, the balance is paid out to one or more nominated beneficiaries as a death benefit payment.
Be Cautious with Lump Sums
My experience suggests that careful consideration should be given to the form of the benefit payment. When a benefit is taken out of superannuation as a lump sum, it is out! Putting it back in is subject to the contribution rules.
It is clearly the tax-effectiveness of superannuation that creates the incentive to return money back into this environment. To the extent that a client is unable to contribute, or the amount to be returned exceeds the relevant contribution cap, then the ability to re-invest in superannuation becomes quite restricted. It may have to be returned to super over several financial years.
Winding up an SMSF
I urge anyone contemplating an exit and wind-up of an SMSF to plan the process carefully. I refer to the required steps, as follows, on the Australian Taxation Office (ATO) site.
- Complete any requirements that the trust deed specifies about winding up the fund
- Pay out or rollover all super benefits (leaving a sufficient amount to pay final tax or expenses if required)
- Appoint an approved SMSF auditor to complete the final audit
- Complete and lodge the final SMSF annual return (including wind-up details)
Pay any outstanding tax
After all expected liabilities have been settled and requested refunds are received, close the fund’s bank account.
I stress that it is important to plan any SMSF wind-up and do things in the right order. Once the SMSF bank account is closed, it can’t be reopened. Similarly, once a fund is wound up, it can’t be reactivated. Getting it wrong can increase wind-up costs and adversely impact member benefits.
This is general advice only. The purpose of this article is to provide you with information and education in a difficult area. As a licensed financial adviser, I strongly urge you to seek personal advice based on your individual needs and circumstances, before making any decision about self-managed superannuation.