Whilst Self-Managed Superannuation Funds (SMSFs) have numerous benefits including flexibility, choice and control over your investments, estate planning and tax management benefits. There eventually comes a time when the time and cost to manage the SMSF exceeds the perceived or actual benefits.
The main reasons that people consider winding up their SMSF include:
- The members’ balance is now significantly diminished as the members have been making pension payments from the fund.
- The members feel they are too busy to attend to the trustee duties and administration of the fund.
- The fund is not suitably diversified.
- Due to the performance of the SMSF they prefer to outsource the management and asset selection to an organisation who is a specialist in this area.
However, before closing down your SMSF you should consider the following;
- Capital Gains Tax
If you have had your superannuation fund for over ten years it is likely to have some assets in the fund that have appreciated in value. If you close down the SMSF you will need to realise these investments and the Capital Gain will be crystallised. If you are under age 65 and have not retired you may be subject to Capital Gains Tax on these profits.
- Capital Losses
If your fund is relatively new, i.e. over the last 5 years, with the recent COVID-19 stock market decline you may have invested in shares or managed funds where their value has declined. In this case, the tax benefits of these capital losses may be lost if you liquidate the assets of the fund and rollover the remaining benefits to a retail or industry fund.
- Loss of Franking Credits
Your SMSF may have a large percentage of the Asset Allocation in Australian shares. These Australian companies generally pay dividends and these dividends have tax benefits, being the franking credit.
If the SMSF is closed and the benefits rolled over to a more diversified fund, these benefits may be reduced or even lost.
- Asset Protection
If you are operating a small business, are a director of a company or in a profession where your customers, employees or suppliers could take legal action against you, then one of the benefits of your SMSF may be to provide some level of protection from creditors under bankruptcy law.
Therefore, if you close down your SMSF and (say) cash out the benefits (assuming you satisfy a condition of release), then the asset protection on those assets may be lost.
- Life Insurance
You may have an existing life insurance policy in your SMSF. If you close the SMSF this policy will be terminated. Therefore, you will need to apply for a new policy in your name or in the new superannuation fund. You will need to go through a medical test. As a result of the medical test, the premiums may be higher than you previously paid through your SMSF, certain benefits may be excluded, certain conditions may be put on the new policy and in the worst situation life cover may be refused.
Should you have any questions in connection with the winding up of your SMSF, please feel free to contact Peter Quinn by submitting an enquiry or calling us on +61 2 9580 9166.