There are legal compliance requirements when winding up an SMSF and it’s important to understand all your obligations before you start the winding-up process.
It’s also important to understand that 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 do it. Ultimately though, every SMSF will need to be wound up by their trustees at some stage.
It’s a matter of when, not if.
Why you might decide to wind up your SMSF
There are many reasons why you might want to wind up your SMSF, including:
- Relieving yourself of the ongoing administrative burden and complexity of managing the SMSF, for example, due to age or health reasons.
- The fund’s assets reducing over time to the point where it’s no longer cost-effective to maintain it. There can be significant administration and annual audit costs associated with running an SMSF.
- A relationship breakdown occurring among fund members.
- All the fund members having passed way, or already having received all their entitlements.
- All the fund members wanting to transfer their entitlements to another super fund. For example, transferring their benefits to an industry or retail super fund.
- You or other fund members wanting to relocate overseas and no longer being Australian residents for tax purposes.
The step-by-step process of winding up your SMSF
Following the six steps below for winding up your SMSF will help to ensure that the process is as smooth as possible.
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 winding-up requirements that it may contain. SMSF trust deeds often contain specific exit strategies that have been put in place to guide the winding-up process.
Verify with all fund members how they would like their benefits to be paid – for example rolled over to another fund or paid out directly to them as a lump sum if they are legally eligible to receive the funds (see the eligibility requirements in Step 4).
Members who wish to rollover their fund to another super fund must complete the following Australian Taxation Office (ATO) form Rollover initiation request to transfer whole balance of superannuation benefits between funds (NAT 71223).
This form should be sent by the member to their new super fund.
The trustees of the fund must then complete, on behalf of the member the ATO form Rollover benefits statement (NAT 70944).
This form should be sent to both the SMSF member and their new super fund.
The fund trustees should prepare the ATO form PAYG payment summary – superannuation lump sum (NAT 70947) for eligible members who choose to receive their SMSF benefits as a lump sum directly.
This form should be submitted to the ATO and a copy kept on file by the fund trustees for five years.
Pay out or rollover all member benefits to comply with all superannuation and trust deed legal requirements.
Members cannot be paid out to their SMSF benefits directly unless they have reached their superannuation preservation age and met a condition of release (such as retiring or beginning a transition-to-retirement pension). A member’s preservation age depends on their date of birth. It ranges from 55 to 59 for people born between 1 July 1960 and 30 June 1964, and is age 60 for anyone born on or after 1 July, 1964.
SMSF benefits must be rolled over to another super fund for members who have not reached their preservation age and met a condition of super release.
SMSF member payments and rollovers may need to be funded by the sale of assets that the fund has acquired as investments on behalf of members. For example, property and shares. It’s important to note that the sale of any SMSF assets must be ‘arm’s length transactions’ at market values. 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 the 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 – see Step 5 below.
- any final expenses associated with winding up the fund (e.g. the accountancy fees of an – see Step 5). 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. The 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 your 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.
Lodging your final annual SMSF return to the ATO includes submitting any member lump sum payment forms. The ATO must be notified in writing within 28 days of your fund being wound up. The ATO will assess the SMSF’s final audited return to determine if there is any outstanding tax payment or refund due.
The ATO are responsible for cancelling the fund’s Australian Business Number (ABN). You will receive written notification from the Australian Business register when the ATO has cancelled your SMSF’s ABN. This notification confirms that the fund has been wound up.
Close your SMSF’s bank account. An SMSF must have zero assets remaining when it’s officially wound up.
The bottom line
There are several potential reasons for winding up an SMSF. There are also a number of legal compliance requirements that must be met during the winding-up process.
The information contained in this article is general in nature and we recommend you seek independent financial advice for your specific situation.