How to wind up an SMSF
Last month, we compiled a guide on the questions you have to ask yourself before deciding to establish a self-managed superannuation fund (SMSF). But what if you already have one that you want to wind up?
There could be many reasons you may need to wind up your SMSF:
- there are no members left – they may have passed away or rolled benefits into other funds
- there are no assets left – the SMSF may have paid members all of their benefits
- divorce – a marriage breakdown may force husband and wife members to split the fund’s assets and may affect the ability of members to effectively undertake their trustee obligations
- insufficient funds – there is not enough money in the fund to keep covering running costs
- relocation overseas – one or more members move to another country, rendering the SMSF unable to satisfy the definition of being an “Australian superannuation fund”
- old age – trustees’ circumstances may have changed in a way that has affected their capacity to effectively manage an SMSF, which can be complex and constantly requires a significant investment of time and expertise
- death – where there is only one member, their legal personal representative will be required to pay out all benefits as per the trust deed or death benefit nomination. Where there is more than one member, other members may not wish to continue the fund.
Once the decision to wind up an SMSF has been made, there are certain obligations and requirements trustees must satisfy – both for the fund’s members and for the SMSF regulator, the Tax Office. Read your superannuation fund’s trust deed, as it may contain vital information about winding up your fund.
We outline the four steps you need to take below. Do remember however, once a fund is wound up, it cannot be reactivated.
Step 1: Notify the Tax Office within 28 days
You need to let the Tax Office know within 28 days of the fund being wound up. You can ask this office to help you do it in writing but you must ensure we have:
- the name of your SMSF
- the Australian business number (ABN) of your SMSF
- your name, phone number and fax number, and
- the date you wound up your SMSF.
Step 2: Deal with members’ benefits
You need to make sure that:
- you deal with members’ benefits according to the superannuation law and the trust deed
- you obtain market value balances of all related accounts
- you ensure all SMSF assets have been sold and member contributions dealt with in accordance with the trust deed and superannuation laws
- you ensure all proper steps are taken to transfer ownership and title of any assets
- you decide whether any corporate trustees in your fund wish to deregister with the Australian Securities and Investments Commission (ASIC), and
- your fund has no assets left once it has been wound up.
You can get this office to find out the balance of any accounts the Tax Office holds for your fund. You can also ask about the status of any activity statements and whether there are any outstanding. Make sure that all activity statements are up-to-date.
If you have wound up your fund but you, as a member, have not met a condition of release – retirement, transition to retirement, or reaching age 65 – you cannot access your superannuation. Your superannuation needs to be rolled over into another regulated superannuation fund. Remember, there are serious legal penalties for accessing your superannuation benefits before you are legally allowed.
Seek advice from this office on the potential capital gains tax (CGT) implications for your SMSF on the disposal of assets to enable the payment of benefits or the rollover of benefits to another fund. Remember though, you do not need to withhold tax when paying a benefit if the benefit is either:
- From a taxed source and being paid as either
(i) a superannuation income stream, or
(ii) a lump sum and being received by a member who is 60 years old or over at the time of the payment, or
- Being paid as a lump sum because the member has a certified terminal medical condition. These payments are normally tax free.
Step 3: Arrange a final audit of your fund
When winding up your fund, you will need to have an audit completed by an approved SMSF auditor before you can lodge your final SMSF annual return. Refer to our article Timely tip for SMSFs: Audit your fund before annual return deadline in our February monthly newsletter to learn more about the purpose of an SMSF annual return, how to appoint an SMSF auditor and what the ramifications are of failing to lodge an annual return when necessary.
Step 4: Complete your reporting responsibilities
When preparing and lodging your annual return, you need to complete all labels in relation to “Was the fund wound up during the income year?”(item 9). You must also pay any outstanding tax liabilities at this time and lodge any outstanding returns from previous years. This office can assist you in these matters.
It is important to wind up your fund correctly. If you fail to carry out these reporting responsibilities, you may be the focus of compliance activities and you may be subject to penalties.
To confirm you have met all of your tax responsibilities, the Tax Office will send you a letter stating that it has:
cancelled your SMSF’s ABN, and
closed your SMSF’s record
on its systems.
What NOT to do…
- Don’t cancel your SMSF’s ABN. The Tax Office will do this once it has been notified of the intention to wind-up the SMSF. The Tax Office will then send the trustee written confirmation that the ABN has been cancelled.
- Don’t assume that lodging a final SMSF annual return and reporting wind up information is the last contact you will have with the Tax Office. You need to finalise all lodgement and payment obligations before you can wind up.
- Don’t dispose of any paperwork. A lot of your records will need to be kept for several years, and some even up to 10 years.
- Don’t close the SMSF’s bank account until all expected final liabilities have been settled and requested refunds are received. Tax liabilities (including the final SMSF levy) can be prepaid or paid with lodgement of the SMSF annual return. Also, once a bank account for an SMSF has been closed, a new one cannot be opened without first producing a new trust deed.
William is a member and trustee of an SMSF. Just before Christmas in 2013, he decides to wind up and transfer his benefits to another superannuation fund. William discovers he has not lodged annual returns for the 2012, 2013 and 2014 financial years. Before his fund can be wound up, William needs to:
- have the fund audited for the 2012 and 2013 financial years and organise a final audit for the 2014 financial year
- lodge the annual return for the 2012 and 2013 financial years
- complete Item 9 in the final (2014) SMSF annual return (which relates to winding up an SMSF)
- allow enough money to pay for:
- audit fees
- the $200 supervisory levy for the 2012 financial year
- the $321 supervisory levy for the 2013 financial year
- the $388 supervisory levy for the 2014 financial year
- any income tax liabilities due, and
- fees to prepare annual returns and any other paperwork due for the 2012, 2013 and 2014 financial years, and
- complete a rollover benefits statement and send a copy to the fund which received his transferred benefits.
William can close the bank account of the SMSF when the final liabilities have been settled. All relevant records will need to be kept.
As you can see from the case study above, winding up an SMSF can be complicated at times. Call us if you have any questions about how to wind-up the fund, need help with filling out electronic lodgements or information about the tax implications of winding up.