Solidifying the disposal of illiquid assets when winding up an SMSF
Disposing of illiquid assets while winding up an SMSF can present a multitude of difficulties and could cost the client if not done properly, says a top auditor.
In the latest technical webinar from ASF Audit about winding up an SMSF, head of education Shelley Banton said trying to realise unlisted shares or units or real property can be difficult, especially if you’ve got a subdued market, and may mean that some investments have restrictions on the disposal or redemption.
“The asset actually could be a frozen asset and there are very specific guidelines about frozen assets in relation to a managed investment scheme,” she said.
“The member may be able to withdraw their money if they’re suffering financial hardship, which means the member will need to make a request to the responsible entity and then demonstrate how they met that hardship criteria.”
However, Ms Banton said the hardship criteria listed on the ASIC website is very restrictive.
“It includes things such as whether the member needs urgent financial help, meaning they can’t pay reasonable and immediate living expenses.”
“It also asks whether the member has been unemployed for at least three months and if they’ve got no other financial support, except for Centrelink payments.
“There may be compassionate grounds, or the member may have permanent incapacity.”
Under financial hardship, the maximum amount that will be paid is $100,000 per calendar year, however, Ms Banton warned there’s no obligation on the part of the responsible entity to offer hardship withdrawals, or to process the member’s requests.
“So if denied, the only real choices then are to sell the asset and pay out the benefits. And obviously, that comes with those timing difficulties because we have no idea how long it’s going to take to pay out those assets.”
“If the member has made a condition of release that can be taken as a lump sum, and that can obviously help with frozen assets.
“But remember that doesn’t count towards a minimum pension payment requirement.”
She said the asset could also be sold to a related party for a cash settlement, but it has to be at market value and if the asset is a collectable, it needs to be valued by a qualified independent market valuation.
Ms Banton added that if the SMSF wind up is the result of a marriage breakdown there is an exception in SIS Act for assets in the fund that can be acquired by a related party, which includes the illiquid assets.
“Section 66(2B) allows for where the member and his or her spouse are separated and there’s no likelihood of cohabitation being resumed which means that any asset allowed in an SMSF can be transferred to a new fund that’s allowed under SIS and that new SMSF’s trust deed, including a life insurance policy.”
“This also extends to pre-1999 unit trusts that can transfer across to a new fund with those same grandfathering provisions found in the original fund.
“But remember that without that marriage breakdown and without meeting that criteria, then the only assets that can be transferred across to a new SMSF are listed shares, business real property, investments in a widely held trust and Reg 13.22C unit trusts.”
Ms Banton said part of the problem in winding up an SMSF is trustees are often unaware of the implications and consequences that may arise.
“They may, for example, not want to break a term deposit because it’s a penalty for early redemption, but then that obviously needs to be weighed up with the cost of compliance rolling into the next year.”
“And where those trustees don’t see winding up as a priority that can also take it into the next year, which means that there’s another round of costs.
“This is where communication is really a priority and it’s critical to make sure that everybody involved in that wind-up process is on board and they’re all singing the same tune.”