Introduction

New figures show that higher number of younger superannuants are turning to setting up SMSFs (Self-Managed Superannuation Funds) for their retirement savings.

In Australia, during the 2022 financial year, a total of 25,656 new SMSFs were established. What is noteworthy is a significant decrease in the number of SMSFs winding up between the 2018 financial year and 2022. During this period, the number of funds closing dropped from 25,142 to just 2,057. Additionally, SMSF assets experienced impressive growth, with a 4.4% increase in FY2022.

This intriguing trend of fewer fund closures and growing assets suggests that the SMSF industry is thriving. Let's explore the reasons behind this phenomenon.

Why Fewer SMSF Wind-Ups?

Longer Lifespans: People are living longer, which means they're keeping their SMSFs active in their later years. As of June 2022, amongst total funds, 63.5% of funds have been active for more than 10 years.

Better Returns: SMSFs tend to deliver superior returns compared to APRA-regulated funds, making them an attractive option with members with high balance.

Control and Speed: SMSFs offer greater control, allowing investors to start their pension payments immediately. In contrast, APRA funds often require a minimum six-week waiting period.

Flexibility and Control: SMSFs provide unmatched flexibility and control, a feature not typically found in APRA-regulated funds. This control is mostly on where the retirements benefits are to be invested, including property where APRA funds do not offer any choice.

Family Involvement: Some families bring their children into their own SMSFs, up to 6 members, preserving their contributions from being consumed by APRA fund fees.

Common Reasons for SMSF Wind-Ups:

As per ATO, the most common reasons for winding up of funds are:

Personal Life Changes: Significant personal life changes can prompt the decision to wind up an SMSF. Relationship breakdown, member(s) permanently moving overseas, or falling sick and unable to manage their funds.

Underperforming Investments: When investments aren't delivering satisfactory returns, trustees may choose to close their fund.

Members Leaving the Fund: If all or some members leave the SMSF (e.g. Death), then the fund would generally be required to be wound up.

Disputes amongst trustees: Disagreements among trustees can also lead to fund closures.

Non-Compliance: SMSFs must adhere to rules and regulations; non-compliance can trigger frustration amount trustees and fund closures.

The Road to Closing an SMSF

Closing an SMSF, especially when it holds fewer liquid assets, requires careful and timely execution. The Australian Taxation Office (ATO) recommends the following essential steps to ensure a successful fund wind-up:

1. Review Trust Deed: Examine the trust deed thoroughly to understand the fund's rules and obligations.
2. Organise Necessary Documents: Ensure all essential documents, including member statements and financial records, are in order.
3. Dispose of Assets: If the SMSF holds assets like property or shares, consider selling or transferring them, if the trust deed permits.
4. Address Tax and Compliance Obligations: Settle any outstanding tax and compliance obligations, including reports and payments like the Transfer Balance Account Report, PAYG Payment Summary, and PAYG withholding payment summary statement.
5. Settle Outstanding Expenses and Liabilities: Pay any outstanding expenses or liabilities tied to the SMSF. E.G Audit fees and any tax or GST liability.
6. Calculate and Distribute Member Benefits: Determine the amount due to each member and distribute it according to the fund's rules or rollover member balance to an APRA fund.
7. Conduct a Final Audit: Complete a comprehensive final audit to ensure compliance with SMSF regulations.
8. Lodge the Final SMSF Annual Return: Submit the final SMSF Annual Return to formally close the fund.
9. Notify Relevant Third Parties: Inform relevant third parties, such as banks and financial institutions, about the fund's closure.
10. 10. Close the SMSF Bank Account: Finally, close the SMSF's bank account once all financial obligations are settled, refunds are received, funds are transferred, and confirmation of fund closure is obtained from ATO.

In navigating the intricate journey of SMSF management and wind-up, careful adherence to these steps is key to success. As the retirement savings landscape evolves, staying informed and making informed decisions is essential for securing your financial future.

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