Had Enough Of Your SMSF? Your Options For Leaving Or Winding It Up

Source: SMSF Association

These options are not automatic solutions. Adding members requires a review of eligibility, the trustee structure and contribution rules. And importantly, outsourcing administration does not remove the existing trustees’ legal responsibilities.

Seeking independent professional advice is generally recommended before making any major decisions about exiting an SMSF.

What other super fund options exist?

If you do decide that the time is right to exit your SMSF and roll your retirement savings into another super fund, you have a few options to choose from.

It is important to compare individual funds as well as fund types: fees, investment options, insurance and services vary between offerings, and some funds may even restrict who can join.

Industry super funds

• These funds initially only allowed workers in their respective industry to become members. Now they often allow anyone to join.
• For the most part, they offer a wide range of investment options.
• They are in most cases not-for-profit and have fees in the low to medium range.
• Most offer a MySuper default option.

Retail super funds

• These funds are run by financial institutions like banks and fund managers, who aim to profit from their fund offerings.
• They usually have a wide range of investment options.
• The fees for these funds vary considerably, from low to high.
• Most offer a MySuper default option.

Public sector super funds

• These funds are open to those who work for the government.
• They usually charge lower fees to members but may offer fewer investment options.
• The member offerings differ considerably, depending on how long you have been a member.
• Most offer a MySuper default option for accumulation account members.

Corporate super funds

• These are super funds set up by companies, mainly as a super fund for their employees only. However, some may also allow non-employees to join.
• Their fee structures differ considerably from fund to fund and are often relative to the size of the employer, with large company super funds often charging lower fees.
• Investment offerings also vary considerably between funds.

There is one further option available to members of SMSFs who decide they no longer want to be responsible for the day-to-day management of their SMSF, but they still want (or need) to keep the assets they have invested in their SMSF. For instance, where the SMSF owns the property from which they run their business.

This option is to convert their SMSF to a small APRA fund.

What are small APRA funds (SAFs)?

A SAF is a private super fund with six or fewer members. Unlike an SMSF, it is regulated by the Australian Prudential Regulation Authority (APRA) and managed by an APRA-licensed professional trustee rather than by its members.

This means the role of trustee and the responsibility for managing the super fund on behalf of its members is passed to a licensed trustee company.

The trustee company takes on full responsibility for the compliance, regulatory reporting and administration of the SAF, removing much of the burden of running the SMSF from the fund members.

If you move to a SAF structure, your fund may be able to retain any illiquid and lumpy investments (such as private company shares, business real property and collectables) within the fund. Typically, these types of assets are not accepted by retail or industry funds.

Changing the trustee of an existing SMSF to convert it to a SAF may allow the fund to continue its existing pension arrangements and preserve applicable grandfathering. This is different from closing a pension and starting a new one in another fund. The outcome depends on the pension and the member’s circumstances, so any effect on social security payments or concession cards needs to be checked before the change.

A SAF can also be a good solution if one of the existing SMSF trustees has lost mental capacity, as you cannot remain an SMSF trustee if you lose capacity. The same applies if a trustee plans to move overseas, which can result in the SMSF no longer meeting the central management and control or Australian residency requirements for SMSF compliance.

A member exit or a full fund wind-up?

If some members want to stay, the SMSF may be able to continue, provided its remaining structure satisfies the trustee and member rules. The departing member’s benefits generally need to be rolled into another complying super fund. Alternatively, if the member has met a full condition of release, the benefits can be paid out of super as a member benefit payment.

If a member exit leaves only one member, the trustee arrangement needs particular attention. A single-member SMSF can have a corporate trustee with the member as its sole director or as one of two directors, or two individual trustees subject to the relevant relationship and employment rules. A fund with individual trustees cannot simply continue with one individual trustee.

The process can become difficult when the fund holds property or other illiquid assets, because raising enough cash may affect the remaining members. That is why it is so important to carefully plan for a member exit.

A member exit involves both transferring or paying the departing member’s benefits and updating the continuing fund’s trustee structure. The following steps outline the process; the details depend on the trust deed, fund assets and member circumstances.

1. Obtain the member’s written request and details of the receiving fund, or obtain payment details where the member is allowed to access their retirement savings.
2. Review the trust deed and document trustee decisions, valuations, conflicts and any relevant professional advice that may have been sought.
3. Confirm the final member balance and plan any asset sales or transfers.
4. For a rollover, verify the receiving fund and process the transfer through SuperStream unless an exception applies. For a benefit payment, confirm that the member has met the required condition of release before paying the benefit.
5. Complete trustee or director resignations and appointments, update asset titles if required and confirm the remaining fund structure is compliant.
6. Notify the ATO of changes to members, trustees or directors of the corporate trustee within 28 days. Where the fund has a corporate trustee, also notify the Australian Securities and Investments Commission (ASIC) of director appointments or departures within 28 days. Update relevant service providers as required. The ATO has standard forms to update changes made to your SMSF.

A full wind-up may be appropriate if no members will remain or the fund balance, compliance demands or investment workload no longer justify continuing.

Before closing the fund, compare the costs and consequences of winding up with the available alternatives.

You may also need help to think through the implications of dealing with the remaining super benefits in the fund, the tax implications of any asset disposals and what the rules in the trust deed require when it comes to winding up your SMSF.

Winding up an SMSF is complex and, depending on the assets involved, can be costly. So, it’s essential to tick all the boxes when it comes to tax, stamp duty, compliance requirements, payment of member benefits, fund audits, pensions and financial statements.

The bottom line

Whether one member is leaving or the whole SMSF is closing, the key is to plan before moving money or assets. The trust deed, liquidity of the portfolio, tax position, trustee structure and needs of the remaining members all matter.

Independent legal, tax and financial advice can help avoid compliance problems and ensure the chosen path is practical for everyone involved.