SMSF wind ups

In the 2011 financial year, for every 10 SMSFs that were established, one was wound up. This ratio has been broadly consistent over the past eight years.

With so many SMSFs being wound up each year, advisers need to ensure that they are aware of the key aspects of SMSF wind ups and the associated implications. As with most things, SMSF wind ups can be costly and messy, if not handled correctly.

General requirements

The following steps must broadly be undertaken when winding up an SMSF:

• ensure money held in the SMSF is paid to the SMSF members (subject to the members meeting a condition of release) or rolled over to another fund;
• pay any outstanding tax liabilities and the supervisory levy to the ATO;
• organise a final audit of the SMSF;
• lodge income tax and regulatory returns; and
• notify the ATO within 28 days of the SMSF being wound up.

Tips and traps

Review SMSF deed

Winding up an SMSF is not necessarily as simple as preparing a trustee resolution.

SMSF trustees have a duty to comply with the terms of the trust. Accordingly, prior to winding up, the SMSF’s governing rules should be carefully reviewed to determine whether any additional wind up requirements exist, specific to that SMSF. If so, these requirements should be complied with.

Consider other options first

Upon the death of the last remaining member, winding up an SMSF can often be the first port of call for advisers. However, this is not necessarily the best option.

SMSF succession should be seriously considered prior to winding up an SMSF. For instance: Has the possibility of an anti-detriment deduction been properly considered? Does the SMSF have any tax losses carried forward that make winding up the SMSF less attractive? Are the assets of the SMSF illiquid and thus difficult to roll over to another fund or distribute?

Trustee liability

Trustees are personally liable for SMSF liabilities. That being said, they are typically indemnified out of SMSF assets.

Upon the winding up of an SMSF, a trustee’s personal liability continues. However, the trustee ceases to be indemnified unless the trustee can successfully take legal action to trace the assets that have been rolled over or paid out of the fund.

For this reason, it is best practice for an SMSF to have a sole purpose corporate trustee and for this trustee company to be deregistered upon the winding up of the SMSF. Doing so will provide further protection against creditors after the SMSF has been wound up.

Other considerations

Some further matters to keep in mind include:

• whether any direct debit arrangements are in place; and
• whether a proposed in specie roll over or transfer will cause a contravention of the prohibition against related party acquisitions (this is prohibited, for example, in the case of residential property).

SMSF wind ups can be quite complex and involve a number of steps. Our new SMSF wind up kit addresses the practical aspects of SMSF wind ups and includes a detailed checklist of the key steps involved.

SMSFs and unit trusts

There have been a number of recent developments regarding SMSFs and unit trusts. These should be considered by SMSFs with investments in unit trusts.

Pre-99 unit trusts and borrowings

The ATO has recently released two interpretative decisions (ATO IDs) regarding SMSFs investing in related unit trusts prior to 12 August 1999 (‘Pre-99 unit trust’). The ATO IDs outline when borrowing by a Pre-99 unit trust, that seeks to qualify as a non-geared unit trust (‘NGUT’), would make the SMSF’s investment in that trust an in-house asset (‘IHA’).

ATO ID 2012/52 — when borrowings are okay

This ATO ID outlines when borrowings by a Pre-99 unit trust do not give rise to IHA consequences.

An SMSF invested in a Pre-99 unit trust that had outstanding borrowings on 28 June 2000. After 28 June 2000, the Pre-99 unit trust did not borrow any further money and later discharged its outstanding borrowings. The unit trust satisfied the criteria in reg 13.22C of the SISR to qualify as a NGUT.

The ATO confirmed that in those circumstances, the borrowings would not cause the SMSF’s investment in the Pre-99 unit trust to be an IHA.

ATO ID 2012/53 — when borrowings taint investment

Conversely, ATO ID 2012/53 outlines a situation where the SMSF’s investment in the Pre-99 unit trust would be an IHA.

The facts of the ID are almost identical to ATO ID 2012/52, with the exception that the trustee had made additional borrowings on or after 28 June 2000 (being the date when reg 13.22C became effective).

The ATO confirmed that the additional borrowings would cause the SMSF’s investment in the Pre-99 unit trust to be an IHA as all the criteria in reg 13.22C were not satisfied. This was because the ‘post-June 2000’ borrowings triggered an event under reg 13.22D. As such, the SMSF must dispose of units in the trust that exceed the value of the allowable 5% IHA limit.

SMSFs and UPEs

With 30 June now behind us, SMSFs with unpaid present entitlements (‘UPEs’) owing from unit trusts should be seeking timely payment of their UPEs.

Broadly, the ATO consider a UPE constitutes a loan by the SMSF to the trustee of the unit trust if it is not paid within 12 months of the end of the relevant financial year.

The ATO, in SMSFR 2009/3, state that a UPE of this type could result in a contravention of the IHA rules, the arm’s length rules and the sole purpose test. Accordingly, SMSFs should ensure that any UPE from a related trust is paid to them in a timely manner.

Fixed trusts

SMSFs should ensure that any income they derive from trusts is due to them holding a fixed entitlement to that income. Thus a unit trust with a discretionary class of units, or where the variation of rights can occur with less than 100% consent, can be risky. Distributions received by an SMSF from a non-fixed trust can technically be taxed as non-arm’s length income at 45% even if the SMSF is entirely in pension mode. However, to date, the ATO have generally not strictly applied this test where the trust’s distributions are proportionate to unit holdings.