Winding up your self-managed super fund (SMSF) is an important financial decision. Once you wind up your SMSF, you can’t reactivate it. So you need to be sure of your reasons for winding up before you decide to do it.
Ultimately though, every SMSF will need to be wound up at some stage when all member entitlements have been paid out and/or there are no more living members. So it’s a matter of when, not if, an SMSF is wound up.
Why you might decide to wind up your SMSF
There are many reasons why you might want to wind up your SMSF, including:
- Declining health or advancing age making your trustee obligations a burden.
- A relationship breakdown if you are in an SMSF with a spouse or partner.
- Transferring the balances of all members (including your own) to another super fund (for example, an industry or retail fund).
- The fund no longer being cost-effective to maintain due to its ongoing running and audit costs in relation to its assets.
- The fund having paid out all its entitlements due to all members having met a condition of release.
- To remove your tax obligations if you (and any other fund members) are moving overseas to live.
Ideally, the decision to wind up your SMSF should have a sound financial basis. The financial (and any other benefits) of winding up your SMSF should outweigh the costs of doing so.
It’s wise to have an exit strategy in place for your fund that is agreeable to all fund members. You can create this strategy when setting the fund up or as part of its ongoing management. Having an exit strategy in place ahead of time helps to make the decision to wind up easier.
Steps in winding up an SMSF
You should seek professional advice before making a decision to wind up your SMSF. If you decide to proceed, you should also seek professional advice to make sure you comply with all your legal SMSF winding up requirements.
Below is a six-step guide to winding up an SMSF if you decide it’s the best option for your situation.
Obtain written agreement to wind up the fund from all members.
Check your SMSF’s trust deed. You need to ensure you comply with any exit strategy requirements that it may contain.
Determine how all fund members would like their benefits to be paid (for example, paid out to them directly or rolled over to another super fund).
Payout or rollover all member benefits to comply with all of your legal superannuation and trust deed requirements.
It’s important to remember that SMSF member payments and rollovers may need to be funded by the sale of property and shares that have been acquired on behalf of members. The sale of shares can be done quickly. However, the sale of property is likely to be more time-consuming. This timeframe needs to be factored into your SMSF winding-up process.
Prior to any SMSF benefits being paid, it’s important that an appropriate amount is left in the fund to cover:
- Any tax obligations that the fund may have.
- Any final expenses associated with winding up the fund (e.g. the accountancy fees of an approved SMSF auditor. Approved SMSF auditors are registered with the Australian Securities and Investments Commission (ASIC). All SMSFs are required to have their financial records audited when winding up their operations by a registered SMSF auditor. An SMSF auditor’s role is to ensure that the wind up is fully compliant with legislation. The cost of winding up an SMSF depends upon the complexity of its financial arrangements and the wind-up process.
Arrange for an SMSF auditor to do a final audit to fulfil all your reporting and tax payment obligations to the ATO. These tax obligations could include:
- Any income that the fund has earned in the current financial year (taxed at the concessional superannuation rate of 15%). That income could include SMSF:
- Member contributions.
- Interest on investments.
- Dividends on shares.
- Rent on investment property.
- Capital gains tax obligations on any SMSF asset sales that are conducted to fund member benefit payments or rollover amounts.
The ATO must be notified in writing within 28 days of your fund being wound up.
Lodging your final annual SMSF return to the ATO includes submitting any member lump sum payment forms. The ATO will assess your SMSF’s final audited return to determine if there is any outstanding tax payment or refund due.
Close your SMSF’s bank account. An SMSF must have zero assets remaining when it’s officially wound up.
If you’re interested in learning more about how a loan within your SMSF will be treated should you need to wind up your SMSF in the future, contact our team of professionals.