How to Wind Up a Self-managed Super Fund (SMSF)
There may be circumstances where you'll want to wind up your self-managed super fund (SMSF). Find out how to here.
Superannuation, also known as ‘super’, is a way to save a percentage of your earnings to be used in retirement. A self-managed super fund (SMSF) is a private super fund where you manage these savings yourself. However, maintaining a SMSF is a major financial decision and requires a lot of time, skills and costs. Read this article if you’ve decided to wind up your SMSF and are considering other options to manage your savings.
What is a SMSF?
An SMSF is an alternative superannuation option that offers the flexibility to make your own investment decisions without the control of a fund manager. This can be particularly beneficial for business owners who want to decide where their super payments go. In managing a SMSF, you can appoint up to four individual trustees or a corporate trustee (essentially a company acting as a trustee). You can read more about the difference between individual and corporate trustees here.
As mentioned above, maintaining a SMSF carries a lot of commitment. Managing your super fund means that you’re responsible for complying with the super and tax laws, which can come with risks:
- You are personally liable for all the fund’s decisions
- Your investments may not bring the expected returns
- You remain responsible for managing the fund even if your circumstances change
- There may be extra costs if there is a relationship breakdown with any of your trustees
- You won’t have any access to compensation schemes or to the Superannuation Complaints Tribunal in cases of theft or fraud
- You could lose insurance from changing super funds.
When should I wind up my SMSF?
It is important to constantly review your circumstances to ensure that the benefits of managing your SMSF actually outweighs the risks involved. The failure to keep on top of your responsibilities may lead to severe penalties and tax consequences. Here are some key considerations before deciding to wind up your fund.
Financial and legal knowledge
Relevant financial and legal knowledge is necessary to effectively manage a SMSF. Such responsibilities include reviewing different investment markets and strategies, complying to tax laws and providing insurance for your fund members. Most SMSFs require further payment for any additional help. You may consider winding up your SMSF if you’re unable to maintain these responsibilities and the obligations to your trustees in your given situation.
Time and money
As emphasised, maintaining a SMSF is a major financial decision. There are ongoing fees in running a SMSF, which may cost more than what you would pay for in another type of super fund. As well as paying for an independent audit and the supervisory levy each year, SMSFs may require further costs for preparing annual returns, financial advice, legal fees, insurance and for the valuation of assets.
Furthermore, it may be the case that you just don’t have enough time to maintain the fund. It was found in the 2019 SMSF Investor Report that SMSF trustees spend on average eight hours a month to manage their fund. This may require you to request for extra help, which again would lead to further expenses. It may be easier to wind up your SMSF and change to a different fund if you’re unable to manage your time and associated costs.
Change in circumstances
Another consideration may relate to the breakdown of a relationship between you and one or more of your appointed trustees. Despite the personal difficulties with the individual trustee, you must continue your legal responsibilities in managing the fund and to act in the best interests of all members. This means that you cannot exclude a trustee from the decision-making process, ignore requests to redeem assets or to take action that goes against the trust deed. It is important to constantly re-evaluate your relationship with your trustees to ensure the SMSF is functional and favourable in your particular circumstances.
How to wind up a SMSF?
There are certain steps involved in order to wind up your SMSF. These include the following:
1. Check the trust deed
A trust deed is a legal document that specifies the rules for operating the fund, including the instructions to wind up the SMSF. The trust deed is signed by all trustees and therefore holds all members legally responsible to comply with the requirements.
2. Deal with all fund assets
You will need to pay out or roll over the balance of your members’ super to another fund. This may require selling assets to pay for final tax or expenses.
3. Final audit
A final audit must be completed before the last SMSF annual return is lodged. Details of the wind up must be indicated.
4. Pay outstanding debts
The final step is to ensure that all outstanding tax and other debts are paid before closing the fund’s bank account.
Winding up a SMSF can be a time-consuming and costly process. It is important to consider and evaluate all your options as once the fund is wound up, it cannot be reactivated. If you need further information, contact a super lawyer.
Vanie is a legal intern at Lawpath and is currently studying a Bachelor of Arts and Laws at Macquarie University. Vanie has a keen interest in legal technology particularly in artificial intelligence and its impact on protecting digital rights.