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Self-managed superannuation funds (SMSFs) offer members lots of benefits, including a great degree of control over investments and some tax advantages. Many members love them, however some also realise after a number of years that maybe an SMSF isn’t the right superannuation solution for them.
There’s a high proportion of closures of SMSFs in any one year – there were 25,034 SMSFs established in the 2017-18 financial year and 10,529 SMSFs wound up.
There could be many reasons for this:
- If the SMSF were 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 up a new one with a new spouse.
- Or perhaps their offspring have just decided they want to put their superannuation into their employer’s industry fund instead of their parent’s SMSF.
- Business partners who had started up an SMSF together might decide to leave a business and want to 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.
- And of course, there are not-so-pleasant reasons, such as in the case of a divorce when a couple who were previously the only members of an SMSF decide to part ways.
But what happens if some members of an SMSF want to stay and some want to leave?
To leave an SMSF a member’s superannuation benefits must be rolled out of the SMSF into another complying superannuation fund.
Separating an individual member’s superannuation assets from other members’ assets in an SMSF can be tricky. Depending on the kinds of assets in the SMSF, and their liquidity, 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 therefore 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
However, it also pays to look at the trust deed and see if it makes any allowances for a member leaving which 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.
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, for example a member wanting to leave be allowed to leave even if other members disagree – if the trust deed allowed 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 SMSFs assets. Once a director of a corporate trustee resigns their directorship, the Australian Securities and Investments Commission 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, a time-consuming and possibly expensive thing to do.
Also, if there are only two members of an SMSF with individual trustees, and one leaves, the remaining member would have 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 dispute settling
For divorce and de-facto separation purposes superannuation is treated as property under the Family Law Act 1975. In most divorces, you would expect that both parties would agree if one party wanted 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. As stated earlier, agreement of all the members is required, both in the case of wanting to leave an SMSF and also wanting another member to leave, unless there is a condition in the trust deed which allows this to be overridden.
The parties could apply to the Family Court for a court order concerning the division of property. The SMSF assets and the superannuation benefits of each member would have to be valued – usually by using an independent valuation – and the court order would use that valuation.
If the two divorcing or separating parties are able to reach an agreement, they could apply for Consent Orders, or if there is no agreement, Court Orders would be obtained through a court hearing – a 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.
In any situation, orchestrating 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 in such cases.