What to do if a member wants to leave an SMSF

• If an SMSF was made up of a couple and their children, there could come a time when their daughter or son may want to leave the SMSF and start their own fund with a new spouse.
• Or perhaps their offspring have just decided they want to put their super into an industry fund instead of their parent’s SMSF.
• Business partners who had started an SMSF together might decide to leave a business and take their super with them.
• A member could move out of the country for a significant period of time and want to leave an SMSF as well.
• When couples divorce.

But what happens if some members of an SMSF want to stay and some want to leave?

What’s involved

To leave an SMSF, a member’s super benefits must be rolled out of the SMSF into another complying super fund.

Separating an individual member’s superannuation assets from the other members’ assets in an SMSF can be tricky. Depending on the liquidity of the assets in the SMSF, it may involve disposing of large illiquid assets, such as property, which may not be in the best financial interests of the remaining members.

It should come as no surprise then that for a member to leave an SMSF (even in the case of divorce) the law requires the other members of an SMSF to agree upon their departure.

Refer to the trust deed

It also pays to look at the trust deed and see if it makes any allowances for a member leaving that override the need for unanimous agreement from trustees.

Executive manager, SMSF technical and private wealth at SuperConcepts, Graeme Colley, says: “How you leave an SMSF comes solely to what the fund’s trust deed says.”

A trust deed will set out the rules under which a member ceases to be a member as well as a trustee of the SMSF.

A trust deed could also give members the ability to remove another member depending on the weighting of their benefits in the fund. For example, a trust deed could allow two members who collectively had more than 50% of the benefits in the fund, the power to remove a trustee even if other members disagreed.

The reverse could also be allowed, that is, a member may be able to leave even if other members disagree. For this to happen, the trust deed may allow for weighted votes depending on a member’s benefits and the member who wanted to leave had more than 50% of the benefits in the SMSF.

Get the structure right

When it comes to leaving an SMSF, a corporate trustee structure may be preferable to individual trustees for administration purposes. It’s much easier to remove a director of a corporate trustee than a member of an SMSF and it also doesn’t affect the title of the SMSF’s assets. Once a director of a corporate trustee resigns their directorship, the Australian Securities and Investments Commission (ASIC) must be informed.

However, in the case of individual trustees, if a trustee leaves the remaining SMSF members must change the titles of all of the SMSF’s assets. This is a time-consuming and potentially expensive thing to do, as assets must be held in the name of all the individual trustees as trustees for the fund.

Also, if there are only two members of an SMSF with individual trustees and one leaves, the remaining member needs to find somebody willing to be a trustee, as the fund must at all times have two trustees, even if one trustee is not a member.

The departing SMSF member could potentially still remain a trustee if both parties were in agreement. In either case, the member will remain a trustee until they resign their trusteeship.

Divorce and member departure

For divorce and de-facto separation purposes, super is treated as property under the Family Law Act 1975.

In most divorces or separations, you would expect that both parties would agree on one party wanting to leave an SMSF. However, this is not always the case and, for whatever reason, there may be no agreement on a divorced party potentially leaving the SMSF.

If the two divorcing or separating parties are able to reach an agreement on who should leave the SMSF (and how the super should be divided), they could sign a binding financial agreement and apply for Consent Orders. If there is no agreement, Court Orders would be obtained through a court hearing – another potentially time-consuming and expensive process.

The court decision could force the dissenting party to consent to the departure of the trustee, with their benefits, but in some cases – especially if it wasn’t a corporate trustee structure – they may decide a wind-up of the SMSF is preferable.

“Broadly, there is almost always a separating/divorcing party who leaves the SMSF and who that is depends on a range of things. If there is disagreement [on who that is], in the absence of a binding financial agreement, this decision will often involve the family court. Or the process of legal proceedings and mediation, etc, may be enough pressure to flush one person out, especially given the costs of legal action,” director of SMSF specialist lawyers DBA Lawyers, Daniel Butler, says.

The bottom line

In any situation, managing the departure of one member of an SMSF is not an easy task. As difficult and awkward as it may be, it’s best to consider the possibility of such an event occurring when establishing the SMSF and creating a trust deed that could be helpful if the need arises.