Self-managed super funds (SMSFs) have an advantage in accumulation phase for people who want absolute control over how their super is invested, and prefer to use direct investments. This advantage does come at a higher cost, compared to having an accumulation account with an industry fund, or a low-cost commercial fund.
When an individual or a couple are in pension phase, the benefit of not having to deal with levels of bureaucracy to access retirement benefits – when added to the control that members have over their investments – is a reason why SMSFs are very popular once a super pension is commenced.
The higher cost disadvantage of an SMSF, even when compared with low-cost industry funds, reduces greatly due to higher administration fees charged on pension accounts. When clients are presented with the advantages of an SMSF in pension phase, despite there being a slight additional administration cost, it is not surprising that they choose to have an SMSF.
There does however come a time when the value of the accounts in an SMSF decreases to the point where there is a major cost disadvantage compared to the alternatives, or one of a couple dies and the work required of the trustees of the SMSF becomes too onerous.
What to do and what not to do
This often leads to the funds being rolled into another super fund and the SMSF being wound up. Unfortunately the steps in an information sheet produced by the ATO, designed to assist in the winding up an SMSF, could create more problems than it solves.
The ATO information sheet contains a table that details what trustees must and must not do when winding up a fund. It is this table that could cause problems. One of the most important steps on the ATO list is a warning for trustees to make sure they deal with member’s assets and contributions correctly. This warning mainly relates to funds where members have not met a condition of release.
After this warning the steps to wind up the fund are:
- have an audit conducted of the fund
- prepare the final tax return for the fund
- notify the ATO in writing within 28 days that the fund has been wound up, and then
- there is a warning that the bank account should not be closed until the final return is lodged and the assessment issues.
ATO requirement: problem + solution
It is the requirement by the ATO to prepare and lodge an income tax return before winding up an SMSF, and keeping the bank account open, that creates the problems. Firstly, as most funds are wound up during a financial year, the final tax return cannot be lodged until after the end of the financial year it is wound up.
This means in practical terms the ATO must be notified in writing first of the windup and then the final tax return lodged.
Secondly, as the tax return will not be lodged until after the end of the tax year, and because SMSF bank accounts in most cases earn interest, the fund will earn income in the financial year after it was wound up and this would require another tax return to be lodged.
A solution to this problem is for an amount to be paid into the trust account of the super fund’s accountant to cover the cost of winding up the fund and lodging the return, the bank account is closed before June 30, and if needed the trust account can be used to deposit a refund as a result of lodging the final tax return.
