Plenty of attention is paid to the rapid growth of self-managed super funds (SMSFs) but perilously little is bestowed on the other end of the SMSF lifecycle. Exiting an SMSF can be complex and many people will need to exit their SMSF at some point. This article explains seven common trigger events that can force a client who is a trustee of an SMSF to need an SMSF exit strategy.
Death is a significant trigger event for a review of the viability of an SMSF. SMSF trustees are jointly and severally responsible for the running of the SMSF, but in practice there are occasions when some trustees are more responsible than others. In the event that a ‘more responsible’ trustee dies, the remaining trustees may not be willing or able to continue in the role of trustee.
The payment of a death benefit also becomes an important issue if indivisible or illiquid assets are involved, or if there are assets such as business real property that the family unit wishes to retain.
If a relationship breakdown occurs between a couple who are trustees of an SMSF it is often highly desirable for each member to make their own future super arrangements. While the former couple may maintain a cordial and constructive relationship, this is not always the case. Running an SMSF with trustees who are not on good terms becomes difficult at best and can be impossible.
Additionally, if a family law split is being made from an SMSF, it’s possible to take advantage of the capital gains tax (CGT) exemptions when moving one of the parties to a small APRA fund (SAF) or a new SMSF. This is generally not available if the family law split is paid to a public offer fund.
As clients age, the loss of capacity because of dementia or other illnesses is an increasing source of concern for SMSF trustees. The prevalence of dementia is projected to increase, so these concerns will escalate.
There are currently more than 413,000 Australians living with dementia. By 2056 this number is expected to reach 1.1 million. Dementia is the second leading cause of death for Australians and in 2016 overtook heart disease as the leading cause of death for Australian women1.
If an SMSF trustee loses mental capacity they cannot continue in the role of trustee and so they’re unable to be a member of an SMSF. There are no legal issues with a person who lacks mental capacity being a member of a public offer fund or a SAF. However, there may be practical impediments to such a person becoming a member of a public offer fund or a SAF if they do not have an enduring power of attorney. Accordingly, ensuring SMSF trustees have an enduring power of attorney is an essential part of the SMSF establishment process.
Loss of interest can be a driving force behind an SMSF exit strategy. Many SMSF trustees are skilled and committed when they commence their SMSF journey but may become less interested and able as they age.
A disqualified person is a person who:
If an SMSF trustee becomes an undischarged bankrupt, they must notify the ATO immediately and make alternative arrangements for their SMSF within six months of declaring bankruptcy. If alternative arrangements are not made within the six months, the fund will fail the definition of an SMSF and is not eligible for tax concessions.
A disqualified person cannot legally be a trustee and, therefore, is unable to be a member of an SMSF. There are, however, no legal issues with disqualified persons being members of a public offer fund or a SAF.
To be eligible for concessional tax treatment, a super fund must meet the definition of an Australian super fund. If a fund fails to meet the test at any time during the income year, they do not meet the definition of an Australian super fund and are not entitled to tax concessions.
A super fund is classified as an Australian super fund if:
For SMSF trustees, the residency test is particularly important. As the trustee is responsible for the central management and control of a fund, their physical location is paramount.
If an SMSF trustee becomes a non-resident, the fund will generally fail to meet the definition as high-level decisions relating to the fund will be made wherever the trustees reside. There is a grace period where the trustees can be temporarily outside Australia for a period of not more than two years and can still meet the definition of an Australian superannuation fund. However, absences beyond two years, or permanent residence overseas will generally see the fund fail the definition.
In a public offer fund or a SAF, the trustee will invariably be a body corporate, incorporated in Australia, with the business of the fund being managed from Australia. As a result, the central management and control test is generally easily met.
Active members are members who contribute, or for whom contributions are made to a fund. For the purpose of the residency test, contributions include rollovers to a fund.
In a public offer fund, although there may be a number of non-resident members who contribute, it is rare that those members hold at least 50 per cent of the fund assets. Accordingly, the active member test is usually not an issue in a public offer fund.
In a SAF, however, given that membership is limited to a maximum of four members, the active member test can be a barrier for non-residents. A SAF can only meet the active member test if non-resident members don’t contribute or if contributory resident members hold over 50 per cent of the fund’s assets.
If you have any questions in relation to exit strategies for your clients’ SMSFs, please call our Client Services Team on 1800 254 180.
1. Source: Dementia Australia 2017.