When winding up an SMSF, there are certain legal compliance requirements that one needs to adhere to. If you understand all the obligations, then, the winding up process will be smooth.
Winding up an SMSF is usually a matter of when not if. The trustees will have at some stage to wind up the SMSF. You need to be certain with the reasons that are making you wind up before you commence the process. Because once you decide to wind up your SMSF, you can’t reactivate it.
Reasons that prompt winding up of an SMSF
- Insufficient assets: When there are no adequate assets left, then, an SMSF should wind up. This usually occurs after members are given pension or lump sum payments, which makes the monies under the custody of the fund to exhaust.
- Health reasons: If circumstance a fund has a single trustee and the health of that member deteriorates, this could spur the process of winding up. The case usually occurs when the sick individual is the main person driving the fund; who is now unable to run the find into the future.
- Burdensome procedures: When people are tired of managing the SMSF, they may also decide to wind up the fund. In some circumstances, the responsibility, paperwork and commitment may appear tiresome to many people. The hassle involved in managing the SMSF may be too burdensome to handle.
- Trustees exiting the fund: In case all the trustees and members of the SMSF choose to leave the fund, there will be no business running it. This usually occurs when these stakeholders choose to transfer their benefits to another kind of fund or have just passed away.
- Death of a member; in some circumstance, the death of one member can agitate the rest of the member(s) to decide not to continue operating the SMSF. This scenario would occur particularly when the driving force behind the fund set up and management is the one that demises.
- A member moving overseas: an SMSF may no longer be considered as an Australian regulated superannuation fund when a member moves offshore – but, it depends on the length of time the absence will last. If one intends to return back to Australia, the individual may choose to appoint a professional corporate trustee company as an alternative to winding up the fund.
- Divorcement: members can divorce and put the fund into jeopardy. In cases where neither of the party wishes to go on with the SMSF, they can choose to wind up.
- Unreliable assets: When the SMSF reaches a level where the fund’s assets are no longer cost-effective to support the running of the fund.
Steps to take when winding up an SMSF
Certain tasks need to be carefully managed for your SMSF to wind up effectively. In case you fail to wind up your SMSF correctly, the fund will remain open, and you might have to incur extra payments for providing the needed annual return lodgements, financial statements and fund audits.
Some of the tasks and considerations that should be taken in the winding up process are discussed as follows:
Examine the SMSF trust deed
when you want to take such a crucial decision, the trust deed should be the first place to look for guidance. The trust deed will show you what should be done when winding up the fund.
Sign an agreement
Every trustee or member needs to obtain a written agreement when closing the fund to make sure all the parties involved are adequately informed and avoid unwarranted complications. If a corporate trustee is managing the fund, it will be up to the directors to decide whether the company should continue to run or be wound up.
Notify the ATO
Don’t forget to notify the ATO when you intend to continue with the process. The notification of the winding up process should be done within 28 days. The following details will be included in the notification:
- Your SMSF’s name and ABN
- The date when your SMSF was wound up
- The contact person and contact details like name, email, phone number etc.
Verify how members’ payments should be made
As you wind up, every member should explain where and how the benefits will be paid. Specifically, they need to state whether their benefits should be paid out as a lump sum or be rolled over to another super fund.
Either rollover or payout member benefits
No assets are usually left in the fund when an SMSF is wound up. Therefore, you will have to comply with both your trust deed and the SIS laws to efficiently move these assets out.
As long as the condition of release is satisfied, you can either roll over the members’ benefits to another complying superannuation fund or paying out lump sums to members.
If you choose to roll over benefits, the two ATO forms that should be completed include:
- Request to transfer whole balance of superannuation benefits between funds (NAT 71223) –your SMSF member’s need to utilize this form to request the transfer of all the benefits to another super fund.
- Rollover benefits statement (NAT 70944) – as a trustee, you are required to complete this form if you intend to roll over benefits to another fund. You will keep one copy and send the other copy to a superannuation fund that the balances of the members are being taken to.
The following are the necessary forms when receiving benefits:
- ETP payment summary – superannuation fund (NAT 2606): If you desire the benefits to be given as a lump sum payment, you will have to fill this form.
- A PAYG payment summary – superannuation income stream (NAT 70987): If a member received an annuity payment or pension and some tax was withheld, the form will have to be completed.
- A PAYG payment summary statement (NAT 3447) – If a payment summary was issued throughout the year, the form would need to be completed.
Capital gains tax issues may emanate where you have to sell particular assets to roll over benefits to another fund or pay out benefits.
Prepare for a final audit and the final SMSF annual return
Usually, an audit is conducted on your SMSF each year; the same will also apply when the fund is wound up. Before you lodge a final annual return with the ATO, you will have to conduct a final audit. You will have to complete the relevant annual return section (which states that the fund is being wound up during the present income year) and also finalize with any outstanding tax liabilities.
Receive ATO confirmation with regard to winding up the SMSF
When you ensure that you do all the things appropriately required, the tax authority will give you a confirmation. The ATO will provide you with a letter states that your SMSFs ABN has been cancelled and your SMSF records closed.
Close your SMSF bank account(s)
You should close your SMSF bank accounts only after receiving the ATO confirmation letter. Upon the final annual return completion, ATO might give the SMSF tax refund. Therefore, it is wise to keep your bank account open to receive this refund in case it is given.
You can alternatively close the bank account if the clients have met the condition of release and the refund will be paid to the clients’ account in trust or accountant’s trust account (it will later be treated as a final commutation).
Post wind up expenses
Until after the SMSF is due to be wound up, it is not easy for particular expenses to fall due.
Instead of letting the SMSF run and therefore, make the windup process to delay, you should close the SMSF and let the former trustees retain some cash till the liability is settled.