How do I get out of a self-managed super fund?
Once you are part of a Self-Managed Super Fund, regardless as to why you became part of it, you cannot simply walk away and hope it goes away. As director of the corporate trustee and a member you are actively responsible and required to be involved in the operation and decision making of the fund.
A SMSF is highly regulated and is required to be audited annually and lodge an SMSF tax return reporting information to the Australian Taxation Office (ATO) in relation to the fund’s taxable income and expenses as well as details about member benefits and contributions.
So how do I get out of a SMSF?
Unlike a retail fund where you simply roll your super balance to another fund you need to attend to your obligations as a trustee/director as well as withdrawing your member benefits from your SMSF.
Divorce, death of a loved one and losing capacity are all life changing events which affect your decision to continue operating your SMSF or windup your SMSF.
Let’s look at how you can exit your SMSF
- Rollover your benefits to another retail fund
A simple scenario is that your SMSF has four members, parents and two adult children. The parents are ageing and as you are one of the adult children you are not interested in being left in a fund with your brother after your parents passing. You want to rollover your benefits to a retail fund.
The process is reasonably straight forward provided all of the members agree. The SMSF trustee updates the market valuation of the fund assets and prepares financial statements to determine the member benefits which are then electronically rolled over into the new super fund via the SuperStream system.
As the trustee is a company you have to resign as a director but there is no requirement to change the title of the SMSFs assets as the trustee (the underlying company) does not change. The changes to the members and the directors of the trustee are required to be notified to the Australian Taxation Office (ATO).
- Wind up your SMSF
A typical scenario is a SMSF with two members, a Jimmy and his wife, Freda. Jimmy is more active in the decision making for the fund. Jimmy gets very sick and passes away at the age of 74. Jimmy and Freda are the directors of the corporate SMSF trustee, J & F Pty Ltd.
The constitution of J & F Pty Ltd controls how Jimmy can be replaced which can be problematic if it does not have an appropriate mechanism.
The death benefits need to be considered and paid out after review of the fund’s trust deed, deceased member’s beneficiaries and any binding death benefit nominations, reversionary pensions or other appropriate nominations.
Freda has to consider if she wants to continue the fund. She can become a sole member and put into place appropriate paperwork to enable J & F Pty Ltd to be a sole director company or simply appoint a relative to be the second director of the trustee. She has six months to restructure the fund.
After receiving professional advice Freda decides to proceed with an SMSF Wind Up.
There are a lot of steps involved in winding up Freda’s SMSF which include:
- review the fund’s trust deed
- dispose of assets
- pay any outstanding fund expenses
- ensure all income has been accounted for
- check for direct debits such as insurance payments
- check for direct credits such as employer contributions
- notify third parties such as external employers
- calculate the tax liability
- calculate the final member benefits and how they should be paid out or rolled over
- have a final audit done
- lodge the fund’s final SMSF annual return
- consider winding up the trustee company
Winding up the fund can be complex. Please obtain advice from your SMSF accountant before starting the process.
What are some of the roadblocks you might come across?
- SMSF members are in dispute
Usually, SMSF members and trustees are the same people and are often related. Complex disputes can be hard to resolve, especially during a bitter divorce or if a member fraudulently withdraws cash from the fund for personal use and the fund is stung with Early Access Penalties.
A SMSF can access Australian Complaints Authority (AFCA) which is an independent body to resolve financial services disputes. However, AFCA is limited to disputes regarding financial firms providing services to a SMSF and does not handle disputes such as removing an unwilling member and trustee or deciding who a death benefit should be paid to.
The fund’s trust deed is crucial in this situation. Proper drafting of the trust deed may allow other mechanisms to resolve disputes, legal advice should be obtained from an SMSF specialist lawyer to ensure the trust deed meets the members requirements. Ultimately, the last resort could be an application to the court which would be costly, substantial time involved, and the outcome may still be uncertain as the court may not intervene unless it finds significant trustee/director duties have been breached.
A SMSF with a corporate trustee should ensure the company’s constitution is drafted to allow an unwilling director to be removed or remove a deceased director and appoint a new director.
- Lumpy assets held by your SMSF
Residential or commercial property held by your SMSF may be difficult to sell and will take some time to bring to the market and get a buyer.
- Finding a buyer for shares or units held in a private company/unit trust
Private shares or units lack an immediate market, requiring time to find buyers. For related companies or unit trusts, other family members can buy the equities provided the SMSF obtains an independent market valuation.
- The family farm is owned by your SMSF
Traditionally, farms are passed down to the next generation. Selling the family farm to settle the SMSF can cause significant family conflict.
- Obtaining market valuations for some assets
Obtaining an independent market valuation for certain SMSF assets, such as unique land,
can be challenging due to the lack of comparable properties. Similarly, valuing units in a
private, unrelated unit trust is difficult as the SMSF lacks control, the trust does not value its
assets at market value, or trustees are unwilling to facilitate or fund the valuation.
What are your Options after you Wind up your SMSF?
- Establish a new Self Managed Super Fund and rollover your existing benefits
- Cash out your benefits provided you have met a Condition of Release
- Rollover your benefits to a retail or industry fund