In a monthly column to assist trustees, specialist Meg Heffron explores major issues relating to managing your SMSF.
In last month’s article, I explained why I started my SMSF at a relatively young age and why I am glad I did.
But a reader raised a good point that can be translated as:
- How will I know when it’s time to wind up my SMSF?
- Then what will I do?
- Will it be difficult?
How will I know when it’s time to wind up my SMSF?
The flippant answer is “when I don’t want to do it anymore” but in fact, that’s not a bad place to start. These days, I’m the only member of my fund and the sole director of my trustee company, so it’s up to me. Right now, I’m happy to have my SMSF. But perhaps when I retire, I will have zero interest in SMSFs including my own? Not wanting to do the work anymore would be a completely valid reason to wind up my fund.
At some point, my ability to look after my fund might start to fade (dementia, other health problems). At that point, I’ll talk to my sons before assuming it’s time to wind up my SMSF. If one or both of them are willing and able to take over running it for me, I’ll leave it intact and just hand over the reins to them.
Neither of them know much about super or SMSFs in particular so, if a handover looks likely, I’ll need to involve them sooner rather than later so I can help in the early days. I could even invite them to become members and we could be trustees together for a time.
At this stage, I still see that as a long way off and will only do it if it’s necessary. In the normal course of events, I’m not keen on having multiple generations in the same SMSF. Even if they did join my SMSF, I’d suggest they left most of their super in their own fund, as one day, they will have families of their own and want to manage their finances with their spouse, not with me.
And that may never happen. Plenty of my clients continue their SMSFs into their 90s. The nature of the help they buy in (or receive informally from the next generation) changes over time but they are still actively engaged in their own super planning and value the flexibility their SMSF provides well into old age. They are my inspiration.
But as passionate as I am about my SMSF, I would wind it up if I wasn’t able to look after it and my sons didn’t want to. I believe an SMSF’s main attraction is that it opens up opportunities. If my sons don’t want to run it, they probably won’t make the most of those opportunities anyway, so why ask them to take on the responsibility?
Death of a member may be a catalyst
For some people, the death of a member is often a driver to wind up and there are probably two reasons for this.
The first is that with two people in an SMSF together, there is almost always one person more engaged than the other. If that person dies, it’s common for the survivor to wind up, often depending on age. Someone who loses the 'active' spouse in their 50s probably won’t wind up the SMSF – they will learn how to do it and probably surprise themselves with their own capability. But someone in their 90s might make a different decision. Both are completely reasonable.
The second reason death is a trigger is that it’s frequently a moment when the fund has to pay large amounts out of super so the fund inevitably gets smaller.
Deceasing assets and tax on inheritance
Decreasing assets is a trigger for winding up an SMSF as at some point, it can stop being cost effective. In fact, it’s worth identifying early – based on the particular features of the SMSF – how low the asset value would need to be to encourage winding up.
These are not decisions to be taken lightly but there will be a threshold where that makes sense for everyone. And remember the transition point is different when your balance is on the way up versus when it’s declining. A young person with a growing super balance may be happy to take on higher costs in the short term for longer-term gain. That won’t make sense for someone with a declining balance so if cost is a key driver for change, getting out of an SMSF might make sense at a higher balance than you expect.
Another wind-up driver might be tax. Once my sons are financially independent (said with firmly crossed fingers) any super they inherit from me will be subject to tax – mostly at 15%. While that sounds like an innocuously low rate, it adds up when you remember it will be applied to my superannuation capital. It might be a big dollar number.
So in the ideal world, I would proactively remove most or even all my money from super (which might mean winding up my SMSF) before I die. Just not too early because it’s very tax effective for me during my lifetime. That’s another reason why 90-year-olds who’ve just lost the active member of their SMSF often choose to wind up. They are reaching the point where they want to protect the next generation from tax. They don’t just exit their SMSF, they exit superannuation entirely.
And of course there are host of other triggers to wind up that might apply in other cases. Relationship breakdown (sometimes an SMSF makes sense when there are two people but not if there’s only one), the sale of an asset that was the primary driver for the SMSF in the first place or even serious breaches of the law that mean the fund and its trustees have attracted the ire of the ATO.
Once I decide to wind up, what will happen?
Winding up will mean removing all the assets from my fund. It doesn’t matter whether I sell them all or just move them ‘in specie’ to their new home (another super fund, my own name outside super, etc), either way the change triggers a capital gain. There are smart ways to manage that capital gain that can mean it’s sensible to manage the wind up over a few years. That’s a decision to make at the time. The key is to think about it carefully to get the best possible result.
If the money is going to another fund, I (or my sons) will need to choose one and probably make decisions about investment options in that fund. All decisions don’t suddenly disappear just because there’s no longer an SMSF involved. My fund’s accountant will need to do some paperwork.
For example, I have pensions in my SMSF so my accountant would need to tell the ATO that they’ve stopped. Ideally, we want to do that before my new fund tells the ATO that they’ve started some new ones for me in their fund. Otherwise, the ATO will think I’ve got both and will assume I’ve gone over the limit known as my ‘transfer balance cap’.
There is also data to be provided to the new fund in a specific format – again something my accountant will handle. And I might need their help when transferring the money from my SMSF to my new fund if my SMSF’s bank restricts the amount I can transfer.
Of course, the money might not be going to another fund. Someone whose superannuation is no longer ‘preserved’ (say they are over 65) can generally just take the money out of super entirely and invest it in their own name. This requires slightly different paperwork.
There’s a final annual return and audit but in reality, they are just like the returns done every other year. Often one of the reasons SMSF wind ups feel like they go on forever is that the fund’s bank account is often left open to receive the final tax refund and this won’t happen until that last return is done.
There are factors that can make wind ups much harder, for example, if the fund has very old-style pensions (often called legacy pensions), reserves, assets that can’t be sold etc. But these can usually be solved with some perseverance and the right advice.
So, my SMSF will definitely end one day, and possibly before I die. When the time comes, I will treat it as a process that happens over a few financial years, not because it has to take that long but because that’s probably how I’ll get the best outcome.
Meg Heffron is the Managing Director of Heffron SMSF Solutions, a sponsor of Firstlinks. This is general information only and it does not constitute any recommendation or advice. It does not consider any personal circumstances and is based on an understanding of relevant rules and legislation at the time of writing.
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