Winding up your SMSF: a step by step walkthrough

There comes a time for many funds when it makes sense to wind up, perhaps because the members have rolled their benefits elsewhere, the fund has become too small to be worthwhile, or the members can no longer manage it. Winding up an SMSF is not as simple as closing a bank account. There are steps that must be done in the right order, and a final audit is required. This article walks through the process.

Why winding up needs care

An SMSF is a trust with legal obligations that continue until it is properly wound up. If you simply stop using it without completing the steps, the obligations, including the annual return and audit, keep applying, and problems can build up. Doing it properly closes the fund cleanly and avoids leaving loose ends with the regulator.

Step 1: Check the trust deed

Start with your fund’s trust deed, because it sets out the rules for winding up. The deed may specify what the trustees need to do and what decisions need to be recorded. Make sure you follow it.

Step 2: Record the decision to wind up

The trustees should formally decide to wind up the fund and record that decision, usually in minutes. This is the starting point and creates the record that the wind-up was properly authorised.

Step 3: Deal with the members’ benefits

Every member’s benefit has to be dealt with. Depending on each member’s circumstances, this usually means either paying out the benefit where a condition of release has been met, or rolling it over to another super fund. You cannot simply leave benefits in the fund. Make sure each payment or rollover is handled correctly and the condition of release is met for any payment.

Step 4: Sell or transfer the assets

The fund’s assets need to be dealt with, usually by selling them so the fund holds cash to pay out or roll over the benefits. Some assets can be transferred in specie, meaning transferred as the asset itself rather than sold, but this has its own rules and tax consequences. Allow time for this, particularly for property or other assets that are not quick to sell.

Step 5: Pay final expenses and tax

Before the fund closes, deal with all outstanding liabilities, including final expenses and any tax owing. The fund needs to keep enough to cover these until they are paid. Do not distribute everything and then find there is a final tax bill with nothing left to pay it.

Step 6: Complete the final audit

A final audit is required before the fund is wound up. The auditor examines the final period, just like any other year, and reports on the financial statements and compliance. The same rules apply, including the obligation to report any contravention in the final period, so the final audit is not a formality.

Step 7: Lodge the final return and close the fund

After the audit, lodge the fund’s final annual return, indicating that it is the last return and that the fund is being wound up. Pay any final amount owing. Once everything is settled, the fund’s accounts can be closed. Keep the fund’s records for the required periods even after it is wound up, because the obligation to retain records continues.

A note on timing

Winding up takes time, so start early. Selling assets, meeting the minimum pension for any pension being paid up to the wind-up date, completing the audit, and lodging the final return all take time to do properly. Rushing the process is where mistakes happen.

The bottom line

Winding up an SMSF means following the deed, recording the decision, dealing with every member’s benefit, selling or transferring the assets, paying final expenses and tax, completing a final audit, and lodging the final return before closing the fund. It is a proper process, not a quick closure, so allow time and get advice where you need it.

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This article is general information for trustees and members. It is not financial, legal or tax advice about your particular situation. Winding up a fund has tax and compliance consequences, so consider getting advice from a licensed professional.