SMSFs are a great tool for creating wealth in a tax effective environment and, because of the self managed bit, enabling you to have total control over your investments.

However, SMSFs also come with lots of rules that need to be followed, with failure to do so potentially resulting in massive penalties. Make an administrative error and each trustee could be fined between $1,050 and $12,600. Break a big rule, resulting in the fund becoming non-complying, and the ATO can take half the value of the fund from you. Yes you read that correctly!

SMSF’s really came into being in their present form around twenty years ago, and those astute enough to get on the cart early are now in their seventies. If this is not you, is it your parents perhaps?

And herein lies the problem. There becomes a point in time, as we gracefully age, that inevitably our faculties start to dwindle and the risk of making an administrative error increases. This can be as simple as losing paperwork, buying an asset in the wrong name, or using the wrong cheque book – all of which can result in fines & non-compliance.

For this older generation, we also have the common situation where one partner, generally the husband, knows how the SMSF works, where everything is, and what the various passwords are, the other partner has no idea. If hubby dies without imparting this knowledge, the estate can have a compliance nightmare on its hands, and a lot of stress for the surviving spouse.

And so I find myself starting to recommend to some of my lovely older clients that perhaps it is time to wind up their SMSF and transfer their balances into retail pension funds.

As you can imagine, this doesn’t always go down well. Especially if they had assumed they would always have an SMSF, or they believe there is nothing wrong with their admin!

This general unawareness of the potential impending problem has led me to believe that we need to start talking about this as an inter-generational issue, especially where super/pension balances will form part of an inheritance.

To help get the ball rolling and start this sometimes difficult conversation, here are some of the common questions I hear;

• Can I wind up my superfund and keep my money in a tax free pension environment? Yes you can, you just need to roll your balance from one fund to another. Don’t just take cash out of your fund, as you then won’t be able to re-contribute it to a new fund. You must ROLL.
• Can I do it myself? Winding up an SMSF is a process that you should not try on your own, there are many pitfalls and reporting requirements that need to be attended to.
• Do I have to sell everything? Yes, as generally only cash can be transferred. However as most people in this situation will be in pension phase there will be no capital gains tax.
• Can I invest in term deposits? Yes – there are some retail super/pension funds that have this facility.
• How long will it take? The transfer from one fund to another can be done in stages as assets are sold. A final set of SMSF accounts, an audit and a final tax return need to be prepared and lodged, so you could expect the entire process to take 6-12 months depending on the size and complexity of the fund.
• Can my accountant do this for me? Your accountant cannot legally assist you with the setting up of a new pension/super fund unless they are also a qualified financial adviser. As I am both a Chartered Accountant and financial adviser, I can offer an end to end process.
• What happens to my balance when I die? Just as for any other super/pension fund the destiny of your balance on death is determined by your death benefit nomination (NOT YOUR WILL). Most leave their balance to their spouse, some to their estate. You need to be careful here as super paid to kids over 18 (directly or via the estate) can be subject to tax.
• Will it be cheaper? Quite possibly yes in the long run. There are some very economical retail funds out there if you know where to look. There will be costs to wind up the old fund and set up the new fund of course.
• When should I do this? A bit like moving into a retirement village or aged care, the decision is best made before it has to be made for you. You want to be in pension phase (to minimise tax), with your full faculties in place.

This is definitely an area that is going to become more relevant as time passes. If you have any questions please don’t hesitate to get in touch.

Lindsay 0413 952180