Nick Bruining: Your step-by-step guide to pulling the plug on a self-managed superannuation fund

If running a self-managed superannuation fund has become too much — or you’re ready to let professionals take over to simplify your life — an exit is a relatively easy process.

But fail to follow a specific order of events and you could end up paying unnecessary tax.

Many SMSF operators have discovered much of the functionality of the fund is now offered through low-cost public offer platforms. This includes access to the Australian and international share markets, exchange-traded funds, term deposits, and local and global bond funds.

In some cases, “full offer funds“ will require you to engage a licensed financial adviser to get the full range of investments on offer. But other funds, including some industry super schemes, now allow you to access many direct investments.

While the costs in most cases will be demonstrably cheaper, being able to say goodbye to the considerable time spent completing forms, dealing with accountants, auditors and the general hassle of being responsible is by far the biggest attraction.

If the fund is still in accumulation phase, terminating the SMSF is likely to trigger capital gains tax rules. In effect, the tax is 10 per cent of the capital gain when the asset is sold.

For that reason, members in accumulation phase need to weigh up the total benefits of exiting the SMSF and moving to a new scheme against the tax expenses that may arise.

Some SMSF members defer the change to a public offer arrangement until retirement, when all members can be in pension phase and all CGT liabilities can usually be avoided.

The only way to avoid the CGT is to have your account in pension phase.

The move to pension phase can only happen after you satisfy a condition of release, which for most is ceasing any employment after reaching age 60, or reaching 65 years old. There are other circumstances which will allow you to start a pension, such as total and permanent disability.

To move funds to another scheme, the pension fund will need to be converted back to an accumulation fund through a process known as a commutation.

You should normally complete the sale of assets before you move to “commute” or terminate the fund. Once the commutation decision has been made, subsequent transactions will be subject to the normal CGT rules that apply to asset disposals in accumulation phase.

While some receiving funds will allow you to transfer assets “in specie”, it is still regarded as a disposal for CGT purposes. You can’t avoid the taxman.

For that reason, the easiest way is to have all the assets in cash.

If the fund is in pension phase, you will need to make the minimum pension payments for the year.

You then need to select the receiving fund and prepare the rollover benefit statement which provides the receiving fund with specific tax and date-based information.

An electronic transfer of funds will need to be done by you as the trustee. That needs to be completed though an authorised superannuation clearing or messaging facility.

Lastly, it’s important that you leave an adequate amount of money in the SMSF to meet the wind-up expenses, which should be similar to the annual expenses you are currently paying.

Assuming you have met a condition of release, any amount left over can then be paid out to you as a final withdrawal from the account.

You then need to formally move and document the decision to wind up the scheme, and notify the Australian Taxation Office within 28 days.

You’re required to keep all the records of the SMSF’s decisions and member statements for at least 10 years, and all accounting records for at least five years.

Hopefully your accountant will be able to assist you in winding up the SMSF, but in the event that becomes difficult, there are accountants who specialise and can assist in winding them up.

Nick Bruining is an independent financial adviser and a member of the Certified Independent Financial Advisers Association