The number of self-managed super funds (SMSF) being established each financial year inevitably gets plenty of attention whenever the latest figures are released or updated.
However, a second figure that is usually much overlooked is the number of SMSFs that are wound-up over the same 12 months.
For the record, the tax office’s Self-managed super fund statistical report – September 2015, shows that 34,071 SMSFs were established in 2014-15 with 4682 being closed.
And 3
The degree of attention being given to the number of SMSFs being established each year is, of course, understandable. In just a few words, the number of establishments underlines the continuing immense popularity of self-managed super.
Many of the million-plus members of existing SMSFs as well as investors planning to establish an SMSF in the near future might not give much thought to the fact that their funds may well eventually close. The vast majority of new trustees, for instance, are probably expecting their SMSFs to remain in existence for decades – unless circumstances change.
Yet as the tax office’s stats underline, funds are regularly wound-up.
The Australian Securities & Investments Commission (ASIC) and the tax office, in its role as regulator of self-managed super, have long urged SMSF trustees and intending trustees to face and plan for reality that their SMSFs will probably eventually close.
Certainly, a small minority of SMSFs pass through generations as adult children join their perhaps ageing parents’ fund. But such multi-generational SMSFs must have sufficient assets to pay out member retirement and death benefits when legally required; this is typically a significant barrier to such funds.
Even before intending SMSF trustees establish a fund, ASIC’s consumer website MoneySmart suggests they have an "exit strategy" in place covering how their fund will eventually be closed in an orderly way. Such a strategy would include the disposal and distribution of fund assets.
"Getting into an SMSF is relatively easy compared to getting out," ASIC comments in its periodically-updated article, Getting out of an SMSF. "It is important to plan an exit strategy [well in advance of a possible closure] to minimise the costs and risks."
Common triggers for fund trustees to close an SMSF include the death/serious illness of its most-active member or asset values eventually becoming too small for the fund to remain financially viable. Perhaps all of a fund’s benefits have been paid out. And, of course, some members reaching very old age no longer want the responsibility or task of running an SMSF. Others split their super following a breakdown in a personal relationship.
Further, some members decide to close their fund after becoming disappointed with its performance.
The tax office has expressed concerns about some SMSFs struggling to meet their compliance and investment obligations – maybe after family circumstances change. Such funds can just linger for years with little or no direction unless professional guidance is obtained and/or the fund is closed.
The tax office has a useful video about an SMSF’s obligations and options following a member’s death, and an information sheetabout how to correctly wind up a fund for whatever reason.
Understandably, investors are usually extremely enthusiastic about establishing self-managed super funds but seem less enthusiastic about closing them down.
It should be emphasised that strategies can be taken with the aim of improving a faltering SMSF’s performance, perhaps with the assistance of a quality financial adviser/SMSF specialist. And as another possible alternative to closure, older members may choose – if appropriate for a family’s circumstances – to gain assistance from suitable adult children in the running their fund.
However, the winding-up of a fund may be the best course in some circumstances. And having an exit strategy already in place should make that task much more straightforward and as hassle-free as possible.
 |
Robin Bowerman is Head of Market Strategy and Communication, Vanguard Australia. As a renowned market commentator and editor Robin has spent more than two decades writing about all things investment. |
|
