When Your SMSF Has Run Its Course

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.

(Reference: https://www.ato.gov.au/super/self-managed-super-funds/winding-up/)

  • 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.