SMSF options: Should you remain invested or wind it up?

Before closing your fund and transferring your assets into an industry or mainstream super fund, it’s important to understand how much it costs to take this step, as well as any taxation implications.

Making the switch

Switching from an SMSF into another super fund is not as easy as just closing the fund and moving your money. As a director or trustee of the SMSF, you have responsibilities to ensure the fund complies with relevant legislation and is up-to-date with its tax obligations and ASIC fees.

In terms of the practicalities of closing an SMSF, Michael Miller, a financial adviser with MLC Advice Canberra, explains your SMSF can pay a rollover benefit to an industry or retail fund alternative, and the fund’s administrator or accountant should be able to assist with this process.

“You may need to sell some of the assets in the SMSF if the new fund isn’t able to accept them. The fund will also need to prepare a final set of accounts and tax return before winding down,” he says.

Depending on the types of assets held, Miller explains you might need to pay selling costs like share brokerage or agent fees to sell a property when winding down your fund.

“The final accounts and tax returns could incur some extra costs, but if you can plan ahead you might be able to keep them to a minimum by completing the closure and rollover around the end of a financial year so it’s only the usual annual accounts that are required.

Winding down the fund needs to be carefully timed to limit the tax that needs to be paid. “Consideration needs to be given to potential losses or capital gains tax considerations if assets are sold,” says Pamela Anderson, director and principal financial adviser with Ballast Financial Management, who says it can cost up to $10,000 in wind-up fees alone.

AMP financial planner Mark Borg notes setting up an SMSF is much simpler than winding one down. “First of all, all benefits must be paid out to members. This can either be done by selling the assets and paying the money to the member or rolling it over to a new super fund or in-specie.” In specie means moving the assets to the member or the new super fund.

“In specie transfers are complex and, as a consequence, costly and not all super funds can accept in-specie transfers. In most instances, assets will need to be sold before to transferring the benefit,” says Borg.

“Following this, you will also need to appoint an auditor to complete the final audit. You will need to notify the ATO within 28 days of winding up the SMSF as well,” he adds.

Investment implications

Many self-managed super funds have their assets held exclusively in bank deposits and listed assets like shares. Most of the pre-mixed investment options in industry and retail funds will have an investment in the same types of assets. They may also be exposed to unlisted assets like commercial properties, private equity or infrastructure assets.

“If you’re using these pre-mixed options you’ll likely have a significant change in how the assets are invested in the future, compared to how your self-managed fund invested in the past,” Miller says.

SMSFs allow members to purchase direct holdings, such as property, which cannot be achieved through a standard superannuation fund. “An SMSF allows investors to borrow money and directly invest in property. This is not available in retail and industry superannuation funds. This holds true for other direct investments such as curios, collectables or unlisted equities,” says Borg.

Direct shares, however, can now be purchased via many standard funds. “If you are not interested in holding direct investments such as real property, you should consider whether an SMSF is the right investment vehicle for you as it involves a lot more responsibility and administration,” he adds.

Factoring in returns

Part of the differences in returns will come from differences in fund expenses. If you have run your self-managed fund with very little outside assistance for administration and investment, your costs may go up in moving to an industry or retail fund. But if you have been paying for external administration and investment portfolio management in the self-managed fund, the pooled costs of an industry or retail fund could actually be lower.

Says Miller: “If your expenses are lower, the return that goes towards your retirement assets will be higher.”

The changes in the asset allocation will also change the returns. If you’ve moved from having your own self-managed fund which was predominantly invested in Australian shares into a more diversified industry or retail fund, then your returns will be much less tied to the Australian share market, for better or for worse.

An SMSF may be a great option for people who want to be actively involved in running their fund and have the time to do so. But if that fails to be true over time it could be an option to close yours down.

The idea is to seek advice and make a dispassionate decision to ensure your superannuation assets are structured appropriately for you.