Advisers need to put more emphasis on back-end scenarios of self-managed superannuation funds and start talking to their SMSF clients regularly about wind-up issues, according to AMP Advice adviser Peter Crump.
When an adviser recommends the commencement of an SMSF, the possible endpoints – intended or otherwise – always need to be taken into account and discussed with the client, he says. A well-advised client, he continues, should be having a regular discussion with their adviser predicated on a simple reminder: “let’s not forget how this fund might finish.”
An SMSF wind up can be simple. If there is one director in accumulation stage transferring their account to another superannuation fund, the implications are likely minor, Crump reckons. On the other end of the spectrum, however, things can get messy.
“You gradually add complexity when you have pension accounts in place and you need to ensure that you don’t unnecessarily lose your exemption from tax on investment income, especially if you’re finessing the capital gains outcome,” Crump says.
Owning property within an SMSF makes a wind-up exponentially difficult, Crump explains, but any unlisted holdings can be just as ‘lumpy’ and just as hard to offload.
“It’s entirely possible that you may have some types of investments where redemption isn’t contemplated, where you essentially hold it for life or until the investment reaches its natural endpoint,” he says. “Consider how that asset is treated in the event of the ownership shifting from the SMSF to something else.”
When it comes to an exit plan, Crump says, liquidity matters.
“Any investment where there’s not a ready daily market such as listed shares or term deposits or cash has the potential to need special consideration in the event of the fund winding up,” he says.
The issues that can lead to a wind-up are varied, Crump adds – from death and divorce to relocation and a lack of interest, there are a host of ways things can end and all of them should be discussed.
“Is it a voluntary wind-up because they’re no longer interested, an involuntary windup because the person is in decline, or the absolute involuntary of death?” he says. “Or, of course, divorce, which doesn’t automatically result in windup but quite often compromises the viability of the fund.”
Making clients aware of what they may encounter on the back end of an SMSF is important for an adviser from a legal standpoint as well, Crump notes. Regular discussions about the implications of a wind-up, recorded in file notes, are an advisers’ best protection.
“If you’re not having those ongoing discussions and the [SMSF wind-up] event is triggered, the family may come back and ask…’did you talk about this recently?’” he explains. “If you haven’t, you’re leaving yourself open and in this increasingly litigious world that’s always a possibility.”
Crump will be speaking on SMSFs wind-ups at the upcoming SMSF Association’s National Conference 2020 on the Gold Coast on February 21.
