Having an SMSF can be a lifetime or a lifestyle decision, but there’ll become a time for the trustees to hang up their boots. This may be caused by the death of a member, loss of a member’s legal capacity, or the fund has served its useful life and run out of money.
In some situations, an option to keep the fund going is by appointing a person as a replacement trustee. This person can be granted an enduring power of attorney or can be the fund’s legal personal representative. This situation can work well for trustees who may have moved overseas for a prolonged period, have lost legal capacity or unable to be trustee for a number of other reasons. However, it is not possible for a person’s legal personal representative to replace a trustee who has been declared bankrupt and, in that situation, it may be necessary to rollover their benefit to an APRA fund.
For anyone who wishes to keep their SMSF intact, but relinquish the trustee responsibilities, it is also possible to convert the SMSF into a Small APRA Fund (SAF), which has a regulator-approved trustee. A SAF is regulated by the Australian Prudential Regulation Authority, compared to SMSFs which are regulated by the Australian Tax Office. The SAF trustee will charge a fee to look after the fund and restrictions may be placed on investment flexibility.
There may be many reasons for winding up an SMSF and members may wish to have their super balance transferred to another complying super fund, such as a retail fund, industry fund or SAF. Another option is to withdraw benefits from the SMSF, provided a condition of release for payment has been met.
Winding up your SMSF may have a number of implications, such as capital gains tax (CGT), stamp duty due when disposing of some of the fund’s assets, and the cessation of insurance policies held on the lives of fund members. If superannuation benefits are rolled over to another fund, it is worthwhile for individuals to review their personal circumstances to ensure death benefit nominations, reversionary pension and the person’s will are all up to date.
There may be assets that need to be sold as part of the winding up process. This is because it may not be possible to transfer the assets to another fund, or the members/beneficiaries may require payment of their benefit in cash. In some cases, it may not be possible to dispose or transfer some assets as they may be "frozen assets". This can be due to restrictions being placed on their sale or purchase and they may need to be transferred to the member as part of a benefit payment, provided the fund rules allow it.
If the fund has built up investment reserves, it may be possible to transfer the reserves to member’s accounts. Any allocation from a reserve plus other concessional contributions for a member in the financial year in excess of a member’s concessional contribution cap may attract a tax penalty. So, if the fund has reserves, advice from a professional SMSF adviser is recommended.
From a Centrelink point of view, a reassessment of a person’s income and assets may be required for social security purposes. This could result in a reduction of Centrelink benefits and a potential loss of favourable assets test treatment for some types of pensions.
Here are some case studies on whether the SMSF should keep going, or whether it should be wound up and transferred to another fund, or withdrawn, and added to personal savings and investments.
Case study 1 – Adrian and Bella
Adrian and Bella are both in their seventies and have had an SMSF for many years. Their combined balance is around the $2 million mark which provides them with their pensions. The minimum pension they are required to take is at least 2.5% of the opening pension balance for the 2020/21 financial year.
They are nearing the time when they feel their pension account balances will decline faster than the income being earned on the fund’s investments. Fund earnings are around 7% p.a., with 4% paid as dividend income and 3% as capital gains. The fund’s investment strategy is simple with 2-3 years of pension payments held in cash and the remainder in Australian shares. The administration costs of the fund are very low which Adrian and Bella don’t see as an issue.
Case study 2 – David and Bianca
David is 72 and retired. His partner Bianca is 59, works full time on a modest salary and has plans to retire soon. To make use of their SMSF most effectively, David has been drawing down a tax-free pension to top up their living expenses. David’s balance in the SMSF is now about $4,700 and Bianca’s balance is about $154,000. Fund earnings are around 7% p.a., with 4% as income and 3% as capital gains. The investment strategy is simple, consisting of cash and Australian shares. Administration costs in dollar terms are similar to Adrian and Bella – but are higher as a percentage of the fund’s total value.
What should our couples do?
For each couple, is the right decision to keep the fund going, or wind it up and invest the money elsewhere? Well, the answer is that it really just depends on an individual’s circumstances.
But before we consider each couples’ situation, let’s examine the features of investing inside and outside of super.
|Inside an SMSF||Outside of superannuation|
A flat rate of tax is payable irrespective of the fund’s investment income.
Account-based pensions paid by the fund to anyone under 60 years of age are taxed at personal rates less a 15% tax offset on the taxable portion of the pension. Once the pension is paid to anyone aged 60 years and older, the whole of the pension received is tax-free.
Taxable capital gains receive a discount of one-third. This equates to CGT of 10% for qualifying investments that have been owned for longer than 12 months.
Franking credits can be used efficiently. Up to 30% of the franking credits received by the fund can be applied against any tax payable. Excess franking credits are refunded to the fund.
Any taxable investment income is taxed at personal rates on amounts in excess of the tax-free threshold, which can depend on the person’s age and other circumstances, such as eligibility for social security benefits. The tax rates increase the greater the taxable income.
Taxable capital gains are eligible for a 50% discount for qualifying investments that have been owned for longer than 12 months.
Franking credits are applied against a person’s tax payable and may result in a refund where the credits are greater than the tax payable. Income earned jointly can be split equally against each joint owner.
|Fees and charges||
Fees and charges may vary depending on the amount of work a trustee is prepared to undertake. These costs can be controlled as the trustees may have accounting or investment management skills, which they can provide at no cost to the fund.
The fund will have some unavoidable costs such as the annual independent audit of the fund by an approved SMSF auditor, and may require an actuarial valuation to calculate the fund’s taxable and tax-exempt income.
Other fees and charges such as brokerage, bank fees and other charges would be payable on the SMSF’s investments.
|Generally, fees can be controlled by the individual who may keep some records for taxation purposes but there is no other statutory reason to prepare and retain records compared to an SMSF. Other fees and charges such as brokerage, bank fees and other charges would be payable in relation to the investments held personally.|
An SMSF is required to have an investment strategy stipulating its investment objectives and allowable investment categories.
It should be in writing, regularly reviewed and should consider the personal circumstances of fund members, including their age and investment risk tolerance.
Depending on the investment provisions in the SMSF’s trust deed and investment strategy, a wide range of investments may be permitted including public and private company shares, managed funds, private trusts, cash and term deposits, direct property and even artworks and collectibles.
However, there may be restrictions or prohibitions on some types of investments, especially where they involve related parties, such as members, trustees, their relatives or private companies or unit trusts that they may control.
There are few restrictions on investments made personally. Access to the amount invested may occur within a relatively short period but would depend on the type of investment.
On the death of a joint owner, investments revert to the surviving joint owner(s) automatically. If the investment is owned as tenants in common, the share of the investment owned by the deceased would usually be subject to the terms of their will.
|Other important features||
Once a member’s benefits have been taken out of the superannuation fund, returning the amount to the fund as contributions may be difficult, especially after reaching 67 years of age as a work test is required to be met.
On the death of a fund member, it is possible to pay a tax-exempt pension to a surviving dependant of the deceased, such as the member’s spouse.
Accounts and records for the SMSF are required to be kept for periods set out in the legislation.
Revisiting Adrian and Bella
If Adrian and Bella decide to keep their SMSF, all fund income and capital gains are tax-free as the fund is wholly in pension phase. Any amounts withdrawn from the fund as pensions amounts would also be tax-free to them as they are both older than 60 years of age.
In contrast, if they withdrew their money and invested it outside super on the same terms, it’s reasonable to expect the income would be tax-free due to some of the tax offsets that may be available to them. However, if they sold some of the investments and made taxable capital gains, they may find that they could be liable for tax as they could exceed their tax-free threshold. Their tax position would also depend on other income they may be currently earning.
In these circumstances, it may seem wiser for Adrian and Bella to retain their fund. Being in retirement phase, fund income, CGT and fund withdrawals are tax free. However, they should review their position periodically to decide whether it’s worthwhile to withdraw their fund balance and invest it personally. This may come at the time when they qualify for social security benefits – but the decision would be guided by other assets and income they have in addition to their SMSF.
Revisiting David and Bianca
David and Bianca are currently in a less flexible place with their SMSF. Without retiring, Bianca is not able to withdraw her super as a lump sum and invest it in her name or jointly with David. If she was to ‘retire’ as defined for a person under the age of 60, she may be able to access the money.
If David and Bianca wished to retain their SMSF, Bianca could access her superannuation as a transition to retirement income stream (TRIS). Tax would be payable on the taxable component of the TRIS until she reaches the age of 60.
The alternative could be to wind up the SMSF and rollover the amounts to another superannuation fund. Whether this is worthwhile could depend on the fees and charges and how long it is before Bianca retires.
Other relevant factors in retaining their SMSF: do David and Bianca have other super money they could rollover to their SMSF? And for how long does Bianca intend to make super contributions?
So – what should each couple do?
In both cases, there are external factors relevant in deciding whether their SMSF should be wound up.
For Adrian and Bella, it would seem retaining the fund is the better option for the time being, though this would need to be reviewed periodically.
As for David and Bianca, it seems best to wind up the SMSF and rollover Bianca’s benefit to a lower-fee super fund until she retires. An alternative could be to delay winding up the SMSF until she has reached 60 years of age and retired.
As you can see there are many moving parts to deciding whether to wind up an SMSF and the right decision is dependent on individual circumstances. Be prepared for delays in winding up the fund as it can be time-consuming and takes patience.
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