Your options when winding-up a self-managed super fund

The latest research shows that over 12,000 self-managed super funds (SMSFs) are wound up each year.

surfing the waves

There are many reasons, or triggers as I like to call them, why a client and their adviser may decide to wind up an SMSF. These include death, relationship breakdown, trustee capacity and disability concerns, disinterest, disqualification or non-residency.

In my many years in working with advisers, I have mostly seen SMSF clients lose interest in managing their SMSF as they get older or they simply find it becomes too onerous. Others may become ineligible to be a trustee due to disqualification - through bankruptcy and disqualification by the regulator, the Australian Taxation Office (ATO) - non-residency and more recently capacity concerns.

The most recent data from the ATO shows the number of SMSF establishments and wind-ups each year (see table below). While there has been plenty of commentary about new SMSF establishments, there is less discussion about SMSF wind-ups.

DateEstablish-mentsWind-upsNet establish-mentsTotal number of SMSFsTotal members of SMSFs
Jun 2014 33,364 12,634 20,730 521,511 987,535
Jun 2015 33,790 12,976 20,814 542,325 1,026,701
Jun 2016 32,865 12,244 20,621 562,946 1,060,681
Jun 2017 30,531 13,263 17,268 580,214 1,093,551
Jun 2018 25,458 18,580 6,878 587,092 1,107,058

Source: Australian Taxation Office 16 October 2018. Population table – annual data

The advantages of a small APRA fund when it’s time to wind
it up

A small APRA fund (SAF) is an SMSF with a professional trustee. This means the critical role of trustee and the responsibility of managing the super fund on behalf of the members is passed onto a licensed trustee company. The trustee company is also responsible for the compliance, regulatory reporting and administration for the fund.

When it comes to winding up an SMSF there are several options available including:

  • a rollover to another APRA regulated fund (retail or industry fund)
  • a member benefit withdrawal payment out of the superannuation system
  • a change of trustee to a SAF.

A change of trustee to a SAF is often overlooked but should be considered as a logical alternative because it can provide additional benefits to members that are not otherwise available.

Benefits of a SAF

Understanding the different exit strategy options as well as the benefits to members that a change of trustee to a SAF offers is increasingly important. Here are some of the key considerations:

Investment options A change of trustee to a SAF will help members who wish to retain unique, illiquid and lumpy investments such as property, private company shares and collectables. The professional trustee of the SAF may accept the types of assets that would typically not be accepted by a retail or industry fund. This could prove most important to members with business-real property used to run a family business or a property which is currently in a capital loss position.
Capital gains tax requirements

In accumulation phase, if a client actions a rollover to another superannuation fund or a member benefit withdrawal there may be a significant capital gains tax (CGT) liability.

Alternatively, converting an SMSF to a SAF is simply the removal of the SMSF trustee and the appointment of the professional trustee. There is no disposal of the investments held within the super fund as the fund is the tax-paying entity and it continues uninterrupted.

A recent example highlighting this benefit was of a senior executive manager, with a top-200 ASX listed company, who was required to move to New Zealand as part of their employment. A change of trustee from their SMSF to a SAF ensured no CGT event occurred within his accumulation superannuation benefit.

In addition, any carried forward capital losses will be retained in the SAF whereas they would be lost if the SMSF wind-up was a rollover or withdrawal.

Centrelink implications

A change of trustee to a SAF does not have any implications for the grandfathering of Centrelink deeming on pensions. The SAF will continue the existing pension arrangement that was initially established within the SMSF.

On the other hand a rollover or member benefit withdrawal payment from an SMSF may have Centrelink implications.

Insurance policy arrangements

If a member rolls over to a retail fund they will generally need to arrange for their policy to be cancelled and reissued. This may result in underwriting requirements. In addition, some historic policies offer benefits that are no longer available in contemporary policies.

Clients who choose to change the trustee to a SAF can retain their existing insurance arrangements. This means that they do not have to go through the underwriting process and can retain any policy benefits that may not be available in newer policies.

The importance of continual cover should not be underestimated, as the inability to regain cover when applying for new a new policy could prove stressful for clients.

Estate planning opportunities Through special purpose trust deeds, a SAF can provide unique estate planning opportunities, compared to a retail or industry fund, particularly for blended families and intellectually disabled members.
Super versus non-super investments A member benefit withdrawal payment from superannuation requires a careful comparison of the tax-effective concessional environment of superannuation to other forms of structures outside superannuation. This decision is often balanced by the expense of running a superannuation product, as opposed to managing personal investments.

In conclusion

There are many triggers for winding up an SMSF, namely death, relationship breakdown, trustee capacity and disability concerns, disinterest, disqualification or non-residency.

A SAF can continue the member’s superannuation strategy and achieve their retirement goals, even when they encounter life-changing events.

exit strategy

More information

Please visit or contact Luke Costa, National Specialist - SMSF Solutions, Australian Executor Trustees on 03 8614 4459.