The growing number of SMSFs always tends to grab the headlines, with nearly 6,000 new registered SMSFs in the September 2009 quarter (31,929 for the financial year to June 2009). But what about those people who wish to wind up their SMSF? There are 3,550 wind ups to June 2009, which would have been a result of benefits having been paid out, members that have died, members moving overseas or simply people realising that SMSFs do not suit their needs.
The fund wind up process can be a particularly frustrating and sometimes painful for both the trustees and the fund administrator (accountant). I regularly get contacted by accountants, advisers and trustees about “how do I wind this f^#@%#) SMSF up?”. It is something that people don’t come across everyday and unless you actively participate within the sector would rarely come across your desk. With 15,500 tax agents dealing with SMSFs and only 3,550 wind ups last year, this equates to one (1) SMSF being wound up per tax agent every four years. I know this lack of understanding can lead to plenty of client frustration as the process simply drags on and on and on (and on)…
Any effective wind up of an SMSF must be a structured and coordinated process. There are many reasons that make this process quite difficult, including frozen investments (lack of liquidity), the need for year end tax reports to be issued (especially wrap accounts), not allowing enough time before year end to sell investments (especially property), waiting for imputation credit refunds, the list goes on…
So, what is the process required to effectively wind up a SMSF?
I have outlined below a “7 step” process to transferring member benefits, and closing a SMSF:
- The trustees need to arrange for all investments be sold and deposit the money into the super fund’s bank account. This may be arranged by the trustees themselves or in conjunction with their financial adviser. Subject to the client’s age and preservation components, they may wish to pay certain assets out as an in-specie lump sum to themselves.
- The trustees will be required to provide their accountant with copies of all current year information they have regarding their SMSF, including bank statements, investment information, contributions, benefits paid, etc.
- The member may provide the trustees with the ATO pro-forma “request to transfer whole balance of superannuation benefits between funds”form. Whilst it sounds silly to be issuing this document to yourself, it is important to ensure the transfer of benefits process is appropriately documented.
- The accountant will be required to prepare draft financials to determine an estimate of the member’s balance for transfer (roll over). It is important to accrue all fees, taxes (including capital gains tax) and charges to ensure that all member balances have had the total fund costs reflected (see note below regarding accruing fees).
- It is important to note that where a member is in receipt of a pension, that the minimum pro-rata pension payment must have been paid before any benefits have been rolled over.
- Upon instructions from the member, a Rollover Benefits Statement (RBS) will be prepared to transfer the benefits across to the nominated complying superannuation fund.
- Arrange to close the fund’s bank account and ensure that there are no further assets held in the name of the SMSF. NB. This should only be closed where the trustees are reasonably satisfied that all fund obligations have been met. If for example, a tax refund is due, you should keep the bank account open until such a time as the refund has been banked and then close the account after paying out this final amount.
- Prepare documentation relating to the wind up of the SMSF, including trustee minutes incorporating the fund’s regulatory requirements. These include:
- preparing and lodging a final SMSF annual return,
- undertaking a final audit,
- de-registering any GST and, PAYG withholding registration, confirming the transfer out of member’s benefits
- ceasing to be a member of the fund, etc.
- provide a final member’s statement (exit statement) to the member showing a $0 balance having paid out all benefits and confirming their membership has ceased with the fund.
- Prepare a letter to the ATO as Regulator to advise them of the wind up of the SMSF. It is a requirement to advise them within 28 days of the fund being wound up. The letter should include the fund’s name, ABN, effective date of the fund’s wind up and contact person for further enquiries.
- Review the fund’s trust deed to ensure that there are no additional requirements to wind up the fund (as all fund’s deeds can be different in how to deal with this process!).
Reviewing of the fund’s governing rules is critical throughout this process as it will outline the requirements to transfer (or pay) benefits, remove members, remove trustees and wind up the fund.
Subject to the nature of the fee arrangement with the administrator, it is sensible to negotiate any fee upfront as the bank account will need to be closed during the process. Several cheques will be drawn in the closing the bank account for fees (accounting, audit, actuary), taxes, and the roll over amounts.
Even though the fund may be winding up, it is still a requirement for the fund to have an audit completed. Remember that the information from the audit is required to be included within the SMSF Annual Return. In addition, an actuary certificate would also still need to be obtained to ensure any tax exempt income is calculated for pension funds.
Can I sell down assets in pension phase to avoid CGT?
Yes, where members are paying existing income streams within a SMSF, the disposal of assets within the fund can be exempt from capital gains tax. Subject to whether all members/accounts are in pension phase, consideration may be given to segregating particular assets to the pension members or pool to reduce any CGT. See article, “pension phase – to segregate or aggregate” for further details.
In addition, subject to the age of a member, the law does not preclude a pension being commenced during the effective wind up of the fund. The pension could be an account based pension or transition to retirement income stream. The main requirement of drawing an income stream for a part-year is that a minimum pro-rata pension will be required to be withdrawn before benefits are transferred or paid out. Therefore, it is important to consideration the fund’s overall CGT position versus the assessability of pension income for a member where a fund is being wound up. Documenting the pension commencement is of course vitally important!
What if I’m due a refund at year end?
It is quite common in pension phase (and also within some accumulation funds), that trustees are expecting a tax refund due to franking credits or they have paid PAYG instalments in excess of what was required. In these instances, a ‘practical’ approach needs to be taken to this process, whereby the following options may apply:
- the bank account may be required to stay open to cash the cheque and then transfer the funds. It is quite difficult to nowadays endorse the back of a cheque to pay to another institution. Therefore, this process will need to be done as after the financial year end as quickly as possible, with any assessable income to be accrued back in the final tax year. A further RBS will be required to transfer this final amount to the member’s nominated super fund.
- if the benefits are unrestricted and can be accessed by the member, these amounts could be directed to be paid to them personally. The regulator will however be required to issue a cheque in the name of the SMSF. The final amount will be treated as a lump sum or pension payment for the final tax year.
In summary, any SMSF wind up with effective planning and communication can be achieved, it just needs expectations set regarding an appropriate time frame and the coordination of the advisers, administrators and the trustees to put plans into action.
The ATO’s publication, “Winding up a SMSF” provides an excellent outline for trustees and professionals to work through to successfully wind up a fund, http://www.ato.gov.au/content/downloads/spr00182487n8107.pdf.