What to do if a member wants to leave an SMSF

To leave an SMSF, a member’s super benefits must either be rolled out of the SMSF into another complying super fund or, where the member has full, unrestricted access to their retirement savings, cashed out and taken out of super altogether.

Separating an individual member’s superannuation balance from the other members’ benefits and 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’s 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 to 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. The SMSF trust deed sets out the rules under which a member ceases to be a member as well as a trustee of the SMSF. It may also specify rules or processes that need to be followed.

A trust deed could 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.

Manage your SMSF smarter – for free

Access practical, independent guides and checklists to help you run your fund with confidence with a free SuperGuide account.

Find out more

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, where the member who wants to leave holds 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, as the corporate entity continues after that director has resigned and no changes need to be made to the ownership of the SMSF assets.

Once a director of a corporate trustee resigns their directorship, the Australian Securities and Investments Commission (ASIC) must be informed.

Where an individual trustee leaves an SMSF, they may need to be replaced in order to satisfy the definition of an SMSF moving forward. The remaining SMSF trustees must also change the ownership and titles on all of the SMSF’s assets to reflect only the remaining trustees. This is a time-consuming process, but it must be carried out, 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 at least two individual trustees, even if one trustee is not a member. An alternative could be to appoint a corporate trustee moving forward. A single-member SMSF can have a corporate trustee with just the one director.

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.

Sample SMSF member exit checklist

Purpose: This general compliance checklist can be used to manage the orderly exit of an SMSF member. This needs to be used in conjunction with any rules or requirements set out in your SMSF trust deed. Professional assistance may be required.

1. Obtain written request to leave the fund

• This should include directions as to whether the exiting member wants their entire balance rolled over or paid out from the fund as a member benefit if eligible.
  • For rollovers: Confirm the member’s new super fund details including the fund name, ABN, Unique Superannuation Identifier (USI), and account/member number.

• For member benefit payments: Confirm the member has met a full condition of release that allows access to their benefits and request banking details for payment.

2. Review your trust deed

• Review the SMSF trust deed for rules on member exits, benefit payments, rollovers, trustee resignation, director resignation and decision-making requirements. Check whether trustee consent, unanimous approval, a specific resolution or appointor approval is required.
• For funds with one or two members, consider whether the exit creates issues under the SMSF definition.
  • Does another individual need to be appointed as a trustee where there is only one remaining member?
  • Should the fund move to a corporate trustee structure?
• If there is a dispute, relationship breakdown, death benefit issue or illiquid asset problem, obtain legal and SMSF specialist advice before proceeding.

3. Trustee meeting and decision-making process

• Hold a trustee meeting to consider the member’s request and the proposed timing of the exit. Document trustee resolutions approving the member’s exit, the method of benefit payment or rollover and any asset sale or transfer strategy.
• Record any conflicts, valuation decisions, liquidity considerations, tax consequences and professional advice obtained.
• Make sure that the directors/trustees sign these minutes and retain them with the SMSF records.

4. Calculations

• Bring the fund’s accounts up to date to the proposed exit date.
• Value all fund assets on a market value basis, with supporting evidence retained on file.
• Determine the final member balance.
• Check preservation components, taxable and tax-free components, pension balances, transfer balance account implications and any minimum pension requirements.
• Confirm whether any contributions deduction notices, pension commutations or transfer balance account reports are required before the rollover or payment.

5. Assess specific fund issues

• Confirm the SMSF has enough cash to pay or roll over the exiting member’s benefit and meet remaining liabilities. If assets must be sold, document the sale process, valuation basis, timing, tax implications and impact on remaining members.
• Consider special issues for property, limited recourse borrowing arrangements, related-party assets, frozen assets, in specie transfers and insurance policies.
• Ensure all transactions are consistent with superannuation law, the trust deed, investment strategy and arm’s-length requirements.
• Notify the SMSF administrator, accountant, auditor, actuary, investment platform, bank, broker, insurer, lender and other service providers.
• Update the fund’s investment strategy, insurance strategy and estate planning records where the exiting member’s departure changes the fund profile.

6. Process rollover or benefit payment

• Verify the receiving fund is a complying superannuation fund and confirm the member’s details match across the SMSF, ATO records and receiving fund.
• Process the rollover electronically using SuperStream unless an exception applies. Complete a rollover benefits statement (electronic) and provide it with payment to the receiving fund within 3 days (or 7 days for paper forms).

• If the member is eligible to receive a benefit directly, confirm the condition of release, tax treatment, payment instructions and reporting requirements before paying.

7. Update SMSF structure

• If the exiting member is an individual trustee, prepare and execute the required trustee resignation documents.
• If a new individual trustee is being appointed, have the appropriate appointment documents, trustee consents and ATO trustee declarations completed and lodged where necessary.
• If the SMSF has a corporate trustee, prepare and execute the director resignation as required.
• If a new director is being appointed, have the appropriate appointment documents, trustee consents and ATO trustee declarations completed and lodged where necessary.
• Check whether asset titles and ownership details need to be updated.
• Ensure the remaining structure continues to satisfy SMSF trustee/member rules after the member leaves.

8. Notify the ATO and ASIC

• Notify the Australian Tax Office (ATO) of changes to members, trustees, directors of the corporate trustee, contact details, addresses or fund status within the required timeframe.
• If the corporate trustee’s directors change, arrange any ASIC notifications and update company registers as required.

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 takes this into consideration if the need arises.

Manage your SMSF smarter – for free

Access practical, independent guides and checklists to help you run your fund with confidence with a free SuperGuide account.

Find out more