SMSF Wind Up or Succession – The Choice Matters

No doubt the SMSF Industry is happy to see the uptick in new SMSFs being established to offset the wind ups that are on the way with the latest SMSF data showing a large cohort of SMSFs with members over the age of 75.

But while everyone rushes to wind up SMSFs belonging to their elderly or deceased clients and to set up shiny new ones for the next generation, are there opportunities being missed?

If advisers and accountants had more of those harder, intergenerational conversations, could they uncover real opportunities that might otherwise be lost?

Lost Opportunities

One of the statistics I’d like to see is how many SMSFs are winding up with tax and capital losses and just how much those losses are. As soon as the wind up date is input into an SMSF Annual Return, those losses are wrapped up in a nice, neat bow as a gift to the government, lost forever.

The opportunity here, is having the discussions before winding up to determine whether the next generation can utilise the losses.

With compulsory super, any working person in the next generation can utilise tax losses against the tax payable on their superannuation contributions. Equally, capital losses, can be used to offset future capital gains made by the SMSF.

Both tax and capital losses belong to the SMSF, they are not linked to the underlying members, so why is everyone so quick to throw them away, just because it is time for some members to leave the SMSF.

Instead, these losses can be another thing the next generation inherit.

Selling investments that could be kept

Typically, a wind up involves selling investments and herein lies another opportunity being missed. Again, unless segregation has been in place which is rare, the investments belong to the SMSF not individual members.

There is the real ability to retain certain assets in the SMSF and not have them sold or pushed out into less tax effective investment structures.

Their CGT cost base and their Division 296 cost base are determined at the Fund level, not the Member level.

By using an influx of new member money to payout rollovers or death benefits for leaving members, the crystallisation of capital gains tax and the loss of Division 296 cost bases can be avoided.

The next generation can keep the SMSF investments in the SMSF structure and take on the Division 296 cost bases for their future selves.

The SMSF Succession Choice

Right now, it seems like winding up is the only choice being discussed with the wave of elderly SMSF clients. But an SMSF doesn’t have to be a one generation wonder. Like an Industry fund, an SMSF can have a life well beyond its original members.

An SMSF that has been set up right and has a valid deed chain, can be an attractive alternative to a new SMSF for the next generation.

Positioning the succession of an SMSF could help you better understand your current clients and to start learning more about your potential future clients.

You might just create an SMSF legacy.

FAQ's

What happens to an SMSF's tax and capital losses when it winds up?

Once the wind up date goes into the SMSF annual return, the fund's tax and capital losses are lost. Both belong to the fund, not to individual members. If the fund continues with the next generation, those losses can stay available.

Can an SMSF keep its investments when older members leave?

Yes. Investments belong to the fund, not to individual members, unless segregation is in place, which is rare. New member money can pay out rollovers or death benefits so assets don't have to be sold. This can avoid crystallising capital gains and losing Division 296 cost bases.

Can an SMSF continue after the original members have gone?

Yes. An SMSF with a valid deed chain can carry on for the next generation. That can be a strong alternative to setting up a new fund.

Find out more about succession planning with an SMSF and offer your clients some extra value - Book a discovery call or ring us on 1300 031 943.