Planning for the end from the start of an SMSF

Author: Richard Webb, Policy Advisor Financial Planning and Superannuation, CPA Australia

Planning is a key part of establishing an SMSF. Trustees think deeply about how they will set up and manage an SMSF. They consider costs, investment returns, assets allocation and insurance, among other factors. Having decided that an SMSF is the most appropriate investment vehicle for members’ retirement savings, it may seem counter-intuitive to contemplate leaving from the start. 

However, when establishing an SMSF, trustees should also consider what to do if the ongoing operation of a fund is no longer in its members’ best interests. As a fiduciary, the duties of a trustee continue throughout the life cycle of the fund. That’s why planning for the end of an SMSF should take place at the very beginning.

There are a range of circumstances which could precipitate the winding up of an SMSF. These could be personal (such as temporary incapacity, death, bankruptcy or divorce) or operational (such as low asset balances or trustee disqualification or retirement). 

Although major events may be contemplated as part of the fund’s investment strategy, other events often do not receive adequate consideration. Yet, the possibility that these events could occur should form part of the initial planning discussion between trustees.

An exit strategy can assist trustees to manage major upheavals which affect the ongoing viability of a fund. Of course, not every circumstance can be anticipated, but planning can help the trustee avoid situations which may be difficult to extricate the fund from, should it be necessary to wind up the fund. 

Trust deeds commonly contain winding up procedures, but these usually cover what to do after the decision to wind the SMSF up has been made. In addition to these provisions, the trustee may wish to include specific clauses in which specify actions to take in certain circumstances.

Some matters (although not all) may require the trust deed to be amended. Others may require additional administrative documents to be completed or signed by members, such as binding death benefit nominations.
Difficulty accessing documentation is an issue which should be anticipated and managed. It may be prudent to store documents, such as ensuring powers of attorney, outside the fund to ensure trustees have full representation in the event they are incapacitated and unable to undertake their duties as trustees. Access requirements for each trustee may vary, and could cover the fund’s internal bookkeeping records, online banking, stockbroking or share registry details. 

The costs of winding up an SMSF must also be considered. One of the most common events which can lead to an SMSF being wound up is a low investment balance in the fund. Trustees may be personally liable in the event that the costs of winding the fund up are larger than the fund assets themselves. To protect themselves from this risk, trustees should regularly review their estimate of winding up costs and make adjustments as appropriate.
Finally, trustees should consider the balance of the fund and how this will be dispersed. Funds may need to be cashed out or rolled over, and dependent income streams may need to be commuted. Assets must be disposed of in a way which is consistent with members’ best interests and does not breach laws such as the arms’ length rules.

If all of this sounds complicated, that’s because it is. This is where seeking professional advice can make a big difference. A trustee who is starting an SMSF may not be aware of the potential circumstances in which the fund may need to be wound up. A professional adviser can assist the trustee to develop an exit strategy which identifies potential issues and solutions for the fund. This will give the trustees comfort that they are prepared should the unexpected happen.