Understanding financial advice
Financial life goals
Tools and resources
Products and services
Investing with IOOF
Your retirement goals
Understanding super & money
The latest research shows that over 12,000 self-managed super funds (SMSFs) are wound up each year.
There are many reasons, or triggers as I like to call them, why a client and their adviser may decide to wind up an SMSF. These include death, relationship breakdown, trustee capacity and disability concerns, disinterest, disqualification or non-residency.
In my many years in working with advisers, I have mostly seen SMSF clients lose interest in managing their SMSF as they get older or they simply find it becomes too onerous. Others may become ineligible to be a trustee due to disqualification - through bankruptcy and disqualification by the regulator, the Australian Taxation Office (ATO) - non-residency and more recently capacity concerns.
The most recent data from the ATO shows the number of SMSF establishments and wind-ups each year (see table below). While there has been plenty of commentary about new SMSF establishments, there is less discussion about SMSF wind-ups.
Source: Australian Taxation Office 16 October 2018. Population table – annual data
A small APRA fund (SAF) is an SMSF with a professional trustee. This means the critical role of trustee and the responsibility of managing the super fund on behalf of the members is passed onto a licensed trustee company. The trustee company is also responsible for the compliance, regulatory reporting and administration for the fund.
When it comes to winding up an SMSF there are several options available including:
A change of trustee to a SAF is often overlooked but should be considered as a logical alternative because it can provide additional benefits to members that are not otherwise available.
Understanding the different exit strategy options as well as the benefits to members that a change of trustee to a SAF offers is increasingly important. Here are some of the key considerations:
In accumulation phase, if a client actions a rollover to another superannuation fund or a member benefit withdrawal there may be a significant capital gains tax (CGT) liability.
Alternatively, converting an SMSF to a SAF is simply the removal of the SMSF trustee and the appointment of the professional trustee. There is no disposal of the investments held within the super fund as the fund is the tax-paying entity and it continues uninterrupted.
A recent example highlighting this benefit was of a senior executive manager, with a top-200 ASX listed company, who was required to move to New Zealand as part of their employment. A change of trustee from their SMSF to a SAF ensured no CGT event occurred within his accumulation superannuation benefit.
In addition, any carried forward capital losses will be retained in the SAF whereas they would be lost if the SMSF wind-up was a rollover or withdrawal.
A change of trustee to a SAF does not have any implications for the grandfathering of Centrelink deeming on pensions. The SAF will continue the existing pension arrangement that was initially established within the SMSF.
On the other hand a rollover or member benefit withdrawal payment from an SMSF may have Centrelink implications.
If a member rolls over to a retail fund they will generally need to arrange for their policy to be cancelled and reissued. This may result in underwriting requirements. In addition, some historic policies offer benefits that are no longer available in contemporary policies.
Clients who choose to change the trustee to a SAF can retain their existing insurance arrangements. This means that they do not have to go through the underwriting process and can retain any policy benefits that may not be available in newer policies.
The importance of continual cover should not be underestimated, as the inability to regain cover when applying for new a new policy could prove stressful for clients.
There are many triggers for winding up an SMSF, namely death, relationship breakdown, trustee capacity and disability concerns, disinterest, disqualification or non-residency.
A SAF can continue the member’s superannuation strategy and achieve their retirement goals, even when they encounter life-changing events.
Please visit www.aetlimited.com.au or contact Luke Costa, National Specialist - SMSF Solutions, Australian Executor Trustees on 03 8614 4459.