How to manage a SMSF when a member wants to leave
Self-managed-superannuation-funds offer a range of benefits including cost savings, flexibility in investment choice and the ability to act at short notice. However, there can be times when a member of an SMSF wants to leave. The member might be divorcing, a child who wants control of their own fund, or a difference of view about whether a SMSF is right for them.
Importantly, many families in business use their SMSFs to help their succession and future goals.
If a member dies they will also “leave” the SMSF
Whatever the case there is a process to allow a member to leave a SMSF.
Tax considerations after death
If a member dies and the SMSF proceeds are paid to the member’s spouse, then those proceeds are free of tax. However, the remaining members will continue to enjoy and use the tax benefit of the investment income in the fund as tax-free income.
The ability to enjoy tax-free income in retirement is great; however, the tax impact of the SMSF tax treatment on death should also be considered globally. If a member is say, 90, and the SMSF is generating a return of 4% a year, the tax saving is worth around 1% to 2% of the fund capital each year. This tax saving should then be compared to the possible death tax impact of the SMSF member dying and the estate incurring tax of 15% on the SMSF payout.
One option, then, is to shut the SMSF while the member is alive to minimise the death tax impact and incur higher taxes while alive.
What’s involved when a member leaves a SMSF
If a member is over 60 and retired, they can either transfer their SMSF balance to another superannuation fund or fully withdraw the monies.
More often than not, the fund accepting the SMSF rollover assets will only accept cash. So the incumbent SMSF will need to sell the assets and realise them to cash. And the asset sale might attract capital gains tax.
Further, for a member to leave a SMSF the other members must also agree on them leaving.
Read the SMSF trust deed
Sadly, every SMSF trust deed is different. So reading the trust deed is important if you are an SMSF member and you want to leave the SMSF. The SMSF trust deed will normally have a process for leaving the SMSF, which will likely take priority over other rules about a member leaving (some global rules like preservation age, etc., cannot be overridden by an SMSF, or it becomes non-complying).
Consider future changes
If your SMSF trustees are natural persons, a member’s departure can create problems. The SMSF must have at least two natural persons as trustees or a corporate trustee who acts for the member if it is a single-member fund.
The reason is embedded in trust law. You cannot contribute money or manage money in a trust capacity for yourself. Superannuation advice on the creation and managing of the the trustee company is important in this area.
Further, if an SMSF member leaves, they must also resign as a trustee of the SMSF. If you have a corporate trustee, this process is easy, as they resign as directors. However, suppose the person was an individual trustee. In that case, the process is frustrating—the person’s name must be removed from the title of every bank account, property held, and share invested.
The change of trust name should not trigger capital gains tax or transfer duty by itself. However, legal advice to coach the transfer through RevenueWA might be helpful.
SMSF and divorce
Your superannuation fund is a marital asset, so the family court can order you to split it. This is the case for same-sex and opposite-sex divorces.
However, even though a person is getting divorced, the sole purpose of the self-managed superannuation fund—to provide for the member’s retirement—is unchanged. So, the SMSF can only transfer the monies to another superannuation fund or, if the member is legally able to, pay them out as a pension or lump sum.
You can access your super fund monies when:
- You are over 60 and retired,
- Over 65,
- Over 60 and starting a transition to retirement income stream.
The family court can choose to either:
- Order that your monies is transferred to another fund; or
- Order that your monies remain in the SMSF and is split later on.
The second option is unusual and rarely occurs. It is typical for a defined benefits fund compared to the ordinary accumulation fund.
Points to note when splitting
Even though you might have mentally chosen to leave the fund, you are still obliged to look after the SMSF assets until you resign as trustee. You can’t “check-out” of your SMSF obligations.
To properly understand the value of the fund assets you must prepare financial reports. This will quarantine and support the accrued tax liability of the fund and all of the fund assets.
Like everything, tax is a major factor. Superannuation is primarily driven by its tax advantages and managing the SMSF split without discussing tax is dangerous.
If the fund is in accumulation mode, the sale of assets might enjoy a capital gains tax discount. However, if the assets are in pension mode, the capital gain might be tax-free.
Conclusion
The separation and exit of a member happen for a reason. The reason is rarely that everybody gets on well and the SMSF investment returns are lovely. So, managing the exit of a family member of an SMSF must be done professionally, with thought and respect for all involved. Otherwise, the conflict, or the potential for conflict, might increase.
At Westcourt, we only look after families in business. Our sole focus is helping families in business – and with our award-winning tax thought and leadership, shown by our SMSF team managing SMSFs with nearly $100m in asset value, we are a clear choice for helping you with your SMSF administration. So if you are looking at your SMSF properly, why not call us?
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