There are many reasons why individuals choose an SMSF as their primary retirement savings vehicle. However for some, there will come a time when the SMSF is no longer appropriate for them.
Join our newsletterVarious life events may result in an SMSF no longer being the most appropriate retirement savings vehicle for an individual including:
- Individuals may find they no
longer have the time, interest or expertise to run an SMSF. Whilst
trustees can outsource the investment management and administration of their
fund, they are still ultimately responsible for the operation of the fund. There
may come a time when they are no longer prepared to accept these
responsibilities (eg at a certain age, as a consequence of legislative
changes/a life event/cognitive decline).
- A loss of capacity in
one or more trustees or directors of the corporate trustee will mean they can
no longer continue to operate the SMSF. Alternatives include replacing that
trustee/director with their attorney under an Enduring Power of Attorney or
their tribunal appointed administrator/guardian [SIS
s.17A(3)(b), SMSFR 2010/2]. However, that may
not be appropriate in all cases. Where an attorney/guardian cannot be
appointed as trustee/director (or it is not desirable to do so), some action
will need to be taken. One option is for the member’s benefits to be
paid/transferred out of the fund. If there are no other members, the fund will
then need to be wound up. Alternatively, the member could remain in the fund but
the fund could be converted to a small APRA fund (a small fund with a
professional trustee).
- Low/declining member balances
may mean an SMSF is no longer a cost effective option.
- Whilst all SMSF
trustees/directors are jointly responsible for the running of their fund, in
practice, there is often one trustee who is more active than others. In the
event of the death/incapacity of that key person, the remaining
trustee/s may not wish to continue running the SMSF.
- In the event of the breakdown
of the relationship between members of an SMSF, it is often desirable for
both parties to put in place their own superannuation arrangements. Neither
of the parties may be willing to take on sole responsibility for the SMSF, or
it may not be cost effective to do so with reduced member numbers/balances.
- For an SMSF to be eligible
for concessional tax treatment, the fund must qualify as an Australian
superannuation fund (ie it must pass a residency test) [ITAA 1997
s.295-95(2)]. Where SMSF members relocate
overseas, there are steps that can be put in place to ensure the fund
continues to meet this test. However, it can be difficult for this residency
test to be satisfied over the longer term, particularly where the relocation
becomes permanent. For some individuals, the most appropriate solution may be
the windup of the SMSF.
- One of the advantages of an
SMSF is the range of assets in which it can invest. An SMSF is often the only
possible structure for an individual’s superannuation balances if they wish
to invest in private companies, hold direct property, purchase
crypto-currencies etc. However, when the particular asset which required
the use of an SMSF is sold, it may no longer be necessary/appropriate to
continue with the fund.
- The disqualification
of one of the fund trustees or directors of the corporate trustee (eg
bankruptcy, conviction for an offence involving dishonest conduct,
disqualification by Regulator) is often the trigger for the wind up of the
SMSF. This is because a disqualified person is unable to be a trustee and
therefore unable to be a member of an SMSF [SIS s.120,
s.126K, s.17A(4), SIS s.17A(10)]. The alternative is
to convert the fund to a small APRA fund but it is often hard to find a
professional trustee to look after the fund in this situation.
- Some SMSFs, inadvertently or
otherwise, breach the requirements of the Superannuation Industry (Supervision)
Act & Regulations. Where breaches are blatant, ongoing, difficult
to rectify, or place a significant portion of the fund’s assets at risk, we
often talk with the trustees about offering to wind up the fund as part of
our negotiations with the ATO. In some cases, penalties can be minimised as a
result.
- Some SMSF members have particular
estate planning needs which are not easily accommodated in an SMSF
environment. For example, if a death benefit pension is to be paid to an
adult child with an intellectual disability, in an SMSF there will need to be
someone willing to act as trustee in the place of the child. Where this is
not possible, an SMSF simply cannot be used.
All SMSF trustees should have an exit strategy – a plan which highlights when it might be appropriate to wind up the fund, any potential impediments, the likely costs and the steps involved. Ideally such a strategy would be prepared prior to the establishment of the SMSF so potential trustees/members know “how to get out before they get in”.