Peter Crump, senior consultant for BDO, said when a conversation about winding up eventuates, the benefit of a comprehensive exit plan comes to the fore.
“Even if you’re not ready to wind up now, it will be much easier when the time comes if you start planning early. When you first set up an SMSF, it’s usually because it meets your needs at that time, but you may not be thinking about when you will wind up your SMSF in the future,” he said.
“As we know, things change and an SMSF may not continue to be right for you. Trustees who don’t have an exit plan are often unprepared and get caught by surprise when an unexpected event means they may need to wind up their SMSF. It’s important to regularly review your circumstances and decide whether you should continue with your SMSF or wind it up.”
He said rather than advising clients about when to wind up, it is best to ask the right questions early to ensure they understand what transpires and the considerations needed if they decide to exit their funds.
“A good adviser gives no information but asks their clients to tell them information. The adviser says, ‘Tell me what would cause you to think this fund would no longer suit your purposes?’” he said.
“[When a fund is established ] you may have a very simple exit plan, but as time goes by – three, four or five years down the track – you have that discussion again and this time a member may decide the fund isn’t what they want, it is then that you have a more mature conversation about the process of winding up.”
When a client is in their 60s or 70s, Crump said, a much deeper discussion about an exit plan should be undertaken.
“[You should be asking questions like] what do you want to happen to the assets in the fund? What is your expectation in terms of us managing the tax outcome, to enhance the tax outcome? Do you want assets to be transferred to a person or a trust? That is why it becomes a much more complicated process the later you start the conversation.”
“If you’re not addressing it at that [late] stage, you’re going to be stuck with, as the ATO said, an unexpected outcome, and the unexpected outcome is that advisers will be picking up the mess, and potentially the beneficiaries might ask why you didn’t have this discussion beforehand.”
He said it is not just financial advisers who may have these discussions but anyone “influencing” clients’ decisions, including accountants.
“They’re talking to people about all their structures, as well as SMSFs. They acknowledge SMSFs exist, so it is an important discussion as these people are ageing to ensure there are no surprises along the way.”
“It will get to the stage where you say, ‘I think we have to have a more serious discussion. Should we keep this fund?’”
He gave an example of a client in their 70s who was experienced in controlling his investments and wanted advice on whether an SMSF was still appropriate to his needs.
“He wanted to know if he could do something similar in a retail environment, so he’s given me the invitation [to open the discussion about winding up].”
“For a person of that age, and looking at the investments he’s got, they could be replicated in a simpler environment. His wife was also unsure about keeping the fund. He encouraged me to give him advice, which I did and recommended he close his SMSF and move into a retail environment.”
Although the client indicated he was not ready to wind up the SMSF at that time, Crump said as an adviser he had offered an alternative on record, and it was the client’s decision not to wind up the fund.
Discussions about winding up and possible exit plans enable clients to feel more confident about the continuity of their superannuation.
“[It gives them confidence] if they know what might need to be discussed and to consider whether they look at moving away from that self-managed fund environment,” Crump said.
“Keep your exit plan close. For advisers, we should be bringing it out every couple of years in the same way that we have discussions about the appropriateness of their estate planning. It’s a regular, ongoing process that should be reviewed, and advisers should keep clients accountable to it.”
