There are a myriad of reasons that lead to a decision by SMSF trustees to wind-up their fund. The reasons may be due to member circumstances, poor fund performance or administration and cost factors.

Membership changes
The circumstances of one or more SMSF members may change to such an extent that they collectively decide that the best option moving forward is to wind up the fund. Key membership-related circumstances include:

• No fund members remaining – the members may have died, withdrawn their benefits or rolled their benefits out of the fund (e.g., to a large APRA-regulated fund).
• Bankrupt members – a bankrupt member cannot remain a member of an SMSF, because they cannot act as an SMSF trustee. In these circumstances, the members may decide that closing down the fund is the best option.
• Permanent incapacity or failing health of a member – the failing health of the member primarily responsible for the day-to-day operations of the fund could mean that the SMSF can no longer be effectively managed.
• Loss of capacity – you are unable to act as trustee if you lose mental capacity. Although an enduring power of attorney (or personal trustee) can be appointed to act on behalf of a member with legal disability, the fund members may prefer to wind-up the fund.
• Death of a member: when a member dies, the remaining fund members may decide they do not wish to remain in the SMSF – particularly if the deceased member was the driving force behind setting up and running the SMSF.
• Relationship breakdown – if the members divorce, this may lead to the day-to-day running of the fund becoming the responsibility of fewer members. Further, members rolling out their benefits could deplete the assets to such an extent that it may be more cost-efficient to close down the SMSF and transfer any remaining member benefits over to a large APRA-regulated fund.
• ATO disqualification– the ATO may disqualify one or more members from being a fund trustee, resulting in the members being compelled to wind-up the fund. Members may also be disqualified from being trustee for other reasons, such as being convicted of an offence involving dishonesty (such as fraud).
• Members have relocated overseas – your SMSF will only qualify for tax concessions if the fund is an ‘Australian Superannuation Fund’. Travelling or living abroad for an extended period may result in your fund no longer being classified as an ‘Australian Superannuation Fund’ – causing a substantial tax liability to arise. If the members expect to move overseas for an extended period, an option for trustees to consider is winding up the fund and rolling over all member benefits to an APRA-regulated fund.

Fund performance, cost or administrative factors

Poorly performing investments may also be a driver to wind-up the fund, as follows:

• Insufficient fund balance – it may no longer be cost-effective to operate the fund. Typically, many funds in pension phase will see a reduction in their pension account balance due to the minimum pension payment requirements. The fund balance may deplete to such a level that it is no longer cost-effective to continue with the fund.
• Poor investment performance – your SMSF investments may have underperformed compared to the returns achieved by other superannuation funds (e.g., a retail fund). You may prefer to roll-over your balance to a large fund to be invested under the guidance of a professional fund manager. Furthermore, if substantial investment losses have led to a
  significant reduction in your fund balance, the members may decide it is no longer in their best interests to remain in an SMSF environment.
• Management burden and lack of time or expertise: Some members may simply decide that they do not have the time, skill or expertise to adequately and effectively manage the fund’s investments. Alternatively, they could tire of the administrative burden of managing their own SMSF and meeting the complex and changing laws, rules and regulations governing SMSFs. Instead, they may prefer instead to wind up the SMSF and transfer their benefits to an APRA-regulated fund where they have no administrative or management responsibility for running the fund.

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Completion of administration duties
Generally speaking, an SMSF professional (such as an SMSF Specialist Advisor (SSA)) is often involved in the wind-up process. This ensures that your obligations and responsibilities are met, and the necessary administrative obligations completed.

Failing to complete these obligations could leave the fund open for another financial year – leading to an increase in costs (an additional audit, tax return and so on). It is important to note, however, that as trustee you are ultimately responsible to ensure these processes are completed.

EXAMPLE
Leaving a fund
Liz and Cheryl are sisters, and members of the same fund. Liz typically does all the work looking after the SMSF accounts. Liz gets married and decides to roll her balance over to a new fund, leaving Cheryl in the fund with a balance of $180,000. Cheryl decides that it is too much work to stay in the fund, and she does not wish to pay additional fees given her fund balance. For these reasons, Cheryl decides to wind-up her SMSF and transfer her balance to an APRA-regulated fund.

There are many reasons for individuals winding up their SMSF. However, check that winding up your fund is the most appropriate solution.

The table below outlines the issues you need to consider.

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Advice before wind-up

Winding up a fund is a major event because you are making a major structural change that could significantly impact on your retirement goals and strategy (e.g., your fund will need to sell or dispose of its whole asset base prior to winding up). For this reason, it may be useful to revisit your overall retirement strategy – consider seeking advice from a suitably qualified SMSF professional, such as an SMSF Specialist Advisor (SSA) to assist you.

Another option to consider before winding up your fund, is to convert your SMSF to a ‘small APRA fund’ (SAF).

An SAF is essentially an SMSF with an independent trustee company (instead of the members being trustee or directors of the corporate trustee). A SAF may be a suitable option (instead of winding up the fund) in the following situations:

• Trustee responsibility – you no longer want the responsibility of being trustee – an independent trustee will assume the trustee role;
• Loss of mental capacity – you cannot remain an SMSF trustee if you lose mental capacity, unless you appoint an enduring power of attorney or personal trustee to act on your behalf. Converting from an SMSF to a SAF and appointing an independent trustee allows the incapacitated member to remain in the fund.
• Bankrupt member – a bankrupt individual cannot be a member of an SMSF because they cannot act as trustee (or director of a corporate trustee) of an SMSF. Becoming a SAF allows the bankrupt member to remain in the fund (i.e., because an independent trustee is appointed).
• Non-resident fund – a condition of your SMSF continuing to be eligible for tax concessions is that your SMSF’s strategic decisions and high-level management activities are conducted within Australia (not overseas). Converting your SMSF to a SAF ensures that these activities remain in Australia because a SAF has an Australian trustee. Note, whilst you are abroad, any contributions may need to be made to an APRA-regulated fund (such as a retail or industry fund).
• Disqualified trustee – if an SMSF member is disqualified from being trustee, the fund could convert to an SAF – allowing the disqualified person to remain a member of the fund.

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CGT

As noted above, winding up a fund may give rise to a capital gain following the sale of assets. However, your SMSF will not need to sell any assets if it converts from an SMSF to a SAF because there is no change in ownership – basically, only the trustee of the fund changes.

EXAMPLE

Another alternative to winding up the fund

Following on from the example of Liz and Cheryl earlier in the module, Cheryl does not wish to transfer across to a different fund. She has a limited recourse borrowing arrangement in place that she would prefer not to unwind. She cannot transfer the borrowing arrangement to a new fund. Cheryl invites Jonathon, her brother to join the fund as his superannuation balance is $195,000. After discussing the proposal at length, Jonathon agrees to join the fund, and rolls his member balance across to the SMSF. This increases the fund balance, and (depending on the assets invested in) the liquidity of the fund.

Unless your SMSF has no assets left, the fund will need to deal with the remaining superannuation balance as follows:

• roll the remaining member balances over to another complying superannuation fund (e.g., an APRA-regulated fund); and/or
• pay a superannuation lump sum to the member, provided an appropriate condition of release is met (e.g., the member has attained age 65). A lump sum can be paid to the member by way of an asset transfer (i.e., an ‘in specie’ payment) – the receiving member should check whether any stamp duty consequences arise from the transfer.
• transferring assets to another complying superannuation fund. Check with the receiving fund whether it can accept the in-specie transfer of assets. For example, a receiving SMSF would generally be a related party of the original SMSF and therefore would not usually be permitted to accept a transfer of real property that does not qualify as ‘business real property’.

WARNING
Where any member has not met a condition of release, the benefits need to be rolled over to another complying super fund. From 1 October 2021, unless it is an in-specie rollover, your SMSF needs to use SuperStream to do this, which includes an electronic rollover benefit statement. 

Irrespective of which option (or options) above applies, disposing of fund assets usually gives rise to tax consequences for the fund disposing of the asset (e.g., capital gains tax). This will affect the final member balances that are paid out or rolled over to another fund. An SMSF Specialist Advisor (SSA) can help you determine the tax cost (if any) of selling the fund assets.

Note, the following tax concessions may apply to the disposal of a fund asset:

• pension assets – if you are receiving a pension, any capital gains from the sale of assets supporting the pension may be fully or partially exempt from tax;
• divorce – tax deferral applies to any assets transferred to another superannuation fund under a marriage breakdown arrangement;
• capital losses – capital gains made on the sale of non-pension assets can generally be offset against existing capital losses; and
• CGT discount – a discount of 1/3rd applies to capital gains made on SMSF assets owned for at least 12 months.

WARNING
In determining the value of members’ benefits, all assets of the SMSF need to be valued at market value. If, as trustee you are having difficulty calculating a members’ account balance, you may need to obtain an independent market valuation. For more on the ATO’s expectations, please refer to their valuation guidelines for SMSFs.

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Planning the sale of assets ahead of time

Ensure that sufficient time is allowed for your SMSF to dispose of its assets. For example, if your fund is selling real estate, it may take time to achieve your preferred price, and then to settle. Sometimes, investments your SMSF holds in other structures (like companies) that are not listed on the stock exchange may also take time to sell. Determining the status of your investment ahead of time allows you to plan how long the wind up could take.

Page 6: Question 4: What administrative requirements need to be attended to?

A number of administrative procedures need to be completed if the members decide to wind-up the SMSF. We recommend that an SMSF Professional (such as an SMSF Specialist Advisor (SSA)) assist you with this.

The table below outlines administrative considerations dependent on the reason for winding up:

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ATO guidance on winding up a fund

The ATO has published the following information to assist trustees on winding up a fund:

• Winding up; and
• Winding up a self-managed super fund.