Amazing as they are, when do SMSFs stop being appropriate?

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. 

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Various 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”.