What To Take Into Account When Closing Down Your SMSF?
Members of SMSF should think hard and take time before deciding to wind up their fund. There may be constraining reasons for winding an SMSF up but there are also many reasons to take into consideration before making a final decision or closing down your SMSF. Failure to do so can be costly.
The strong growth in the number of SMSFs is grabbing headlines. But is usually overlooked that many SMSF members, for several reasons, decide to wind up their funds. Statistics show that 25,440 funds are being established but 15,537 were wound up. The reasons for setting up a fund may have lost their validity perhaps because of members’ changing needs and circumstances.
There are various kinds of events that cause the closing of funds. One of the most common ones includes insufficient asset. This happens when members have paid a pension over many years and have resulted in a low account balance. This may also be because they have taken out a lump sum, have rolled over the fund to another super arrangement, or died and a death lump sum benefit was paid or given to their beneficiaries. Capital losses that cannot be used before the fund is wound up can be a concern because they are trapped in the SMSF.
Members losing capacity also trigger fund closure. It is usually a gradual process which is why it is important to recognise the signs and take necessary steps when a member’s mental or physical problem or impairment gets to the stage when they can no longer do their part as a trustee. Once a loss of capacity occurs, and there is no one to assume the trustee’s role, the only alternative is to wind up the fund.
There are many couples who have SMSFs and it is usual that one of them take responsibility for the fund. On the death of that responsible person, the survivor or surviving partner may prefer to wind up the SMSF and go to an easier super arrangement where they do not have trustee responsibilities that come along with SMSFs.
The lack of time may also make members close the fund because they might have underestimated the time and effort needed to be a trustee. This may also be caused by other circumstances or employment, which give them little time to devote to the fund.
Another reason why most SMSFs are wounded up is when a member moves overseas indefinitely making them fail the residency test which is a requirement of super legislation. There is a two-year allowable absence for trustees, and the test requires that the absence should be temporary. The consequences of failing the residency test are severe because the fund will be made non-compliant in the year when the trustees leave Australia.
The Advantages and Disadvantages of Closing Down Your SMSF
Even if there are good reasons for closing down your SMSF, it is best to have a full assessment of the advantages and disadvantages of this process.
If the fund is in the accumulation process, members may get a capital gain or loss and payable tax. The question is, is it worth triggering early capital gains tax (CGT) liability on assets that can possibly remain in the fund for many years.
This very important especially if the members are approaching retirement and need to use their retirement savings for their pension. Once in the pension phase, there is no need to pay for CGT when assets that support pension payments are sold by the SMSF.
A significant obstacle is when unutilised realised capital losses can be a concern because they are trapped in the fund and will be lost on the wind up.
The same applies when an SMSF is in a net loss status or has unused carry-forward losses in revenue. Shortfalls in revenue or losses, like capital loss, are trapped in the SMSF trust. These cannot be distributed or transferred out of the fund. Any unused losses in revenue will be lost when the fun winds up.
Super accounts are usually protected from creditors of the members under bankruptcy laws. SMSFs offer the opportunity to own and protect business assets like real property used in the members’ business.
The option to add new members to an SMSF should considered before winding up the fund. These new members (most of the time, children or relative or business associates) can take advantage of the flexibility of the fund and tax benefits. The continuity of ownership and use of business real property should be an important consideration.
There are a lot of things to consider before closing down your SMSF. We recommend that you get advice from a specialist or an SMSF auditor to make sure that it is in your best interest and plan in advance for a potential wind up in case of reduced capacity to run it yourself and other reasons.
Kingston Knight Audit are the Auditor Melbourne experts to contact when dealing with your trust account audit, SMSF Audit, financial statement audit, and internal audit requirements. Contact us today, Kingston & Knight Audit offers a free telephone consultation to establish how we can best help you achieve the assurance and compliance you require.