It is common that when people get older they want a more simplified superannuation structure and a SMSF is not necessarily the optimal structure.
The following highlights the main implications to closing down your SMSF and rolling over the funds, to say, an industry or retail fund.
1. Capital Gains Tax
When an asset, in particular an appreciation asset such as property or shares is transferred out of a superannuation fund a capital gains tax event is triggered. The capital gains tax is triggered whether the asset is sold in the SMSF and the cash proceeds are paid as a lump sum to the member(s), or rolled over to another complying superannuation fund or transferred as a in specie transfer in consideration of the members accumulated retirement benefits.
Where members of the superannuation fund are fortunate enough to be in pension stage, then this capital gains tax can be minimised. Generally assets that are in pension stage, that is those assets that financially support the payment of the complying pension will be exempt from capital gains tax when they are disposed of. Please note that the recent Federal Budget have proposed changes that can effect this tax free status in some instances.
2. Capital losses
It is important to note that where the superannuation fund is in accumulation phase, not pension phase, and the assets are sold at a loss, a capital loss will be realised. This is common where your SMSF is not performing, maybe the assets you have purchased have lost value, and you feel the SMSF is not for you. In this case if you realise the assets and rollover the monies to a retail or industry fund then the taxation benefit of the carried forward capital losses will be lost.
3. Life insurance policies
Many SMSFs include substantial life insurance policies for the members. This is particularly common for executives and professionals who are members of a SMSF. The reason that the individual has included this policy in their superannuation is to gain a tax deduction that would not be available if the policy was acquired outside of superannuation. Where the superannuation fund if closed down then the life insurance policy will be cancelled. This is a major problem where the member is unable to get suitable cover in the new superannuation fund.
Many members assume that if they apply for life insurance in the new fund they will be automatically accepted, this is not always the case. However, if the member retained the existing cover in the SMSF it would be generally renewable from year to year without the need for the requirement of additional health tests.
4. Protection of assets
Superannuation can provide a level of protection from creditors under bankruptcy law. It is common for the superannuation fund to own the business premises in the superannuation fund and rent those premises to the owner’s operating entity. This successfully separates the assets of the superannuation fund from the operations of the business. If the property was conversely owned by the business trading entity, if that entity experienced financial difficulties, then the property could be sold by a liquidator in the event of bankruptcy or liquidation.
Should you require any information please contact Peter Quinn by submitting an online enquiry or calling us on +61 2 9580 9166 to book an obligation free appointment.
The information in this document does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it. It is important that your personal circumstances are taken into account before making any financial decision and it is recommended that you seek assistance from your financial adviser.