A- A A+

When to quit an SMSF

18 December 2014  |  Super

ByeThe growth of SMSFs has been spectacular, indicating that many are sceptical of the finance sector. Such secpeticism is not without justification. There is scant evidence that fund managers can exceed the index consistently, and there is extensive evidence that the higher the fees they charge, the worse the returns. it is not an area where value for money can be readily demonstrated.

But not everyone is suited to an SMSF. Most observers agree that there needs to be at least $200,000 to make it worthwhile, and SMSF investors are not professionals, so they tend not to diversify and manage risk in the accepted manner. The Age notes that many are clsoing their SMSFs, even as the overall growth continues:

 

"Although it may seem as if every man and his dog have their own self-managed super fund, the reality is quite different. The Australian Taxation Office's figures show the number of people opening an SMSF is declining, while the number of trustees winding up their fund is rising.

According to the ATO there were 33,935 SMSFs opened in the year to June 2012, whereas only 31,861 were started in the following year. In the year to June 2012 a total of 7119 people wound up their fund, whereas in the following year 7653 people shut down their fund.

Expect this trend to continue with new rules which came in on July 1 that expose trustees that breach SMSF rules to fines of $10,000 or more.

It's not just the threat of fines that leads people to close their SMSF. Although it may seem glamorous to own your own fund the reality can be a paperwork mountain.

Joshua Stega, director, JAS Wealth, is in the process of winding up an SMSF. His client is in her early 70s and, as sole director of the trustee company, has decided an SMSF is no longer the best option.

"The responsibilities of being a trustee are too onerous and something she would rather outsource," Stega says."

 

There are man reasons for closing an SMSF, such as a member dying or disappointing retrns. There is strong evidence that the best option for amamteur investors is to choose index funds, whcih will probably do better than 80-90 per cent professional investors.

But there are always residual issues:

 

"Generally we see benefits rolled out to a retail or industry fund. Or funds may be taken as pensions, lump sums or death benefits," says David McKellar, a partner with Allied Business Accountants.

It's worth pointing out that winding up a SMSF takes time and costs money. McKellar explains the fund also has to complete a final tax return and have final financial statements audited.

"Costs will generally be similar to what they would be if the fund was continuing," he says. "We would generally charge a fee of around $300 for the wind-up and deregistration, in addition to the cost of preparing the final tax returns and financial statements. I've seen other providers charge thousands for the same service."

If the fund has a corporate trustee, it will also generally be wound up, which McKellar says costs $37. If the fund held investments in property, or other complex investments, there may be additional costs involved in disposing of those investments or winding up other structures.

Pellegrino says this is often the case with funds with a balance of $250,000 or less. For these funds, the cost to run them can outweigh the return on investment. Plus, fees for retail funds have dropped so much in the past few years it simply doesn't make financial sense to run your own fund unless you have a big balance.

"If a client has $150,000 in an SMSF, they'd be looking at fees of $2500 a year to run it. This compares to annual fees of $1640 if you have your money on a retail fund platform," he says.

There is one significant drawback to closing an SMSF and parking your money in a retail fund: insurance. "It might not be possible to take out insurance in the new fund if the client's health has changed since the SMSF was started and insurance was placed inside it. In a few cases we have not been able to transfer cover over without going through a new underwriting process," Pellegrino says.

The message to investors is this: starting a fund just because you think it's a status symbol is not a good idea. Do you research to work out if it makes financial sense to run your own fund, and be honest with yourself about whether you have the time and the skills to run an SMSF. If you don't it might be a better idea to stick with a retail or industry fund.

How to shut down your fund

According to JAS Wealth director Joshua Stega there are five steps trustees need to take to close down their fund:

  • Ensure all your prior year SMSF accounts are completed and up-to-date.
  • Inform your SMSF administrator that you wish to close your SMSF.
  • Get an estimate of any windup expenses, such as tax and accounting costs, and retain this amount in the SMSF cash account.
  • Start removing the other assets from the fund, usually by rollover to another super fund, or paid out as pension payments.
  • Prepare final SMSF accounts and audit, pay outstanding liabilities and notify the ATO of the wind-up.
 

 



Similar articles from Super

Cutting out the middle man

 | 12/14/2014

Rick KlinkSMSF investors who are looking to diversify their investments often find themselves paying high annual fees. One provider reckons they have the solution.


The conflicts of interest in super, wealth management and financial advice

 | 12/8/2014

conflictThe dominance of the banks and insurance companies has defined the wealth management, super and fianncial advice industries. There are many potential structural conflicts of interest and DIY super investors need to understand the implications.


Murray recommends no borrowing in SMSFs

 | 12/7/2014

RulesThe FSI has been released and it is recommending no borrowing in SMSFs. It is also recommending changes that would affect the major banks and the residential property market.


More tap their super to pay down housing debt

 | 10/27/2014

HelpMore are using their super to pay down housing debt. But measures to make it easier would be a very bad idea because it would make the local capital markets even more concentrated.


Have you used related party loans in your super?

 | 10/23/2014

RelatedThe ATO may be about to make changes to the law and it is advisable to be careful.


 

Subscribe

Subscribe to the Personal Super Investor weekly email to keep abreast of developments in SMSF law and investment markets. SMSF investors looking to improve investment returns from shares, property, cash or other specialised investments, will find the PSI weekly newsletter an invaluable resource.

Subscribe now »

Disclaimer

The contents of this website are of a general nature only and have not been prepared to take into account any particular investor's objectives, financial situation or particular needs. Our content is not intended to be advice and must not be relied upon as such. You should seek independent advice tailored to your specific circumstances prior to making any decisions. Personal Super Investor does not provide financial product advice or recommend any financial products: Where this website or it derived newsletter/electronic publication refers to a particular financial product, whether it be within our editorial or a 3rd party advertising, advertising promotion or advertorial, then you should obtain a Product Disclosure Statement (PDS) relating to that product and consider the PDS before making any decision about whether to acquire the product. We also recommend that you should seek professional advice from a financial adviser before making any decision to purchase any financial product referred to on this website. We do not make any representation or warranty that any material on the Personal Super Investor website will be reliable, accurate or complete, nor do we accept any responsibility arising in any way from errors or omissions of our content or any content provided by any advertiser appearing the Personal Super Investor website. We will not be liable for loss resulting from any action or decision by you in reliance on the Material (whether editorial or advertising) on the Personal Super Investor website, nor any interruption, delay in operation or transmission, virus, communications failure, Internet access difficulties, or malfunction in your equipment or software. By using the site you acknowledge that we are not responsible for, and accept no liability in relation to any content contained on the site that you may use, including any other users’ use of the Personal Super Investor website in any circumstance. You use the Personal Super Investor website at your sole risk.