More choices for retiring SMSF members

The growth in the number of self-managed superannuation funds (SMSFs) in recent years has been considerable, with statistics showing there were almost 394,000 in existence in 2008, up from just over 226,000 in 2001.

The total assets held by SMSFs has likewise grown substantially, from $132.4 billion in June 2004 to $347.5 billion in September 2008.

At the same time, a report by the Australian Taxation Office (ATO) last year showed that almost 17 per cent of all SMSF members are over 64, and over 34 per cent are aged between 55 and 64.

Taken together, these statistics suggest that a significant proportion of SMSF trustees are either in, or close to retirement, and we can expect to see a growing number of old age SMSF members.

However, running a fund is complex and time-consuming, requiring attention to, and understanding of, compliance and regulatory requirements, financial markets and tax issues, to name a few.

For trustees, it can sometimes seem that there are continual changes and tweaking of the rules that apply to SMSFs, some of which can create unforseen challenges, and others that can create new opportunities.

As SMSF trustees grow older, it seems increasingly unlikely that they will wish to continue with the responsibility of managing the fund and it is probable that there will be an increase in people looking for other options to manage their SMSF for them.

Some trustees will find there are too many other things to do in retirement that they enjoy far more than reading financial reports, such as travelling, spending time with grandchildren, or playing golf.

For others, the passing of time will mean they simply become incapable of running the fund due to declining health and energy, or ongoing ailments, loss of mental capacity, changing family needs or different investment circumstances.

For example, there is usually one person in a marriage or relationship who looks after the finances, and with current retirees and those about to retire this person is usually the male. In the ATO’s statistics, the majority of SMSF members in both the over-64 age group and the 55-64 age group were male.

However, women generally outlive men, potentially creating a situation where women need to take over management of an investment fund they don’t understand, or indeed have any real interest in.

The death of the spouse who was the member primarily responsible for the SMSF could be a major problem for the fund.

If this happens without a suitable plan in place for someone else who has the required knowledge and experience to step in as trustee, and continue meeting the fund’s investment criteria, the fund may become non-compliant and lose its tax advantages.

This can be a heavy price to pay, and there are other penalties that could be imposed by the ATO.

Many trustees believe the only option available to them if they no longer want to run their own fund is to wind it up and transfer the balance to a managed super fund.

However, this is not the case. There are other alternatives, which are outlined below.

Become a Small APRA Fund

A Small Australian Prudential Regulation Authority (APRA) Fund (SAF) is a good option for those who would still like to have a say in the choice of investments but no longer want to deal with the responsibilities such as managing investments, accounting for investment income, pension payments, organising financial statements and annual returns, and audit preparation.

The approved trustee is not a member of the fund, allowing the members to relinquish the responsibilities of the trustee role if they are becoming too onerous.

It works by transferring the trusteeship to an approved trustee, with APRA replacing the ATO as regulator.

A trustee can be a company or group of individuals that meet the requirements of risk, fitness and Responsible Superannuation Entity (RSE) licensing in order to be qualified as an approved trustee.

One benefit of this approach is that no capital gains event is triggered if the fund is still in accumulation mode. It means the fund can maintain existing investments and avoid the capital gains tax that would otherwise be payable if members chose to roll out the benefits to a public offer/managed fund. If the SMSF is already in pension mode, there would be no capital gains tax considerations anyway.

SAF members still have the choice of investments, although limited to a list acceptable to the approved trustee, and can continue to rely on advice provided by a separate financial planner.

However, SAFs are typically more expensive to run than SMSFs because of the fees payable to the trustee. On the other hand, the benefits to elderly members may make this worthwhile.

Transfer to family members

Succession planning is another option, where the founding members’ children are encouraged to also become members of the fund. Over time, day-to-day running and administration of the fund can be taken over by these younger members.

For many SMSF trustees, this approach has the attraction of ensuring that the best interests of this specific group of members is at the forefront, rather than the fund becoming one of perhaps many funds being looked after.

There are a number of administrative steps that will be required if this approach is taken, such as notifying the regulator and adding an additional director and member to the various records, tracking contributions separately, and transferring the new member’s funds (if any) from other superannuation funds. If the fund is in accumulation rather than pension mode, no capital gains tax would be triggered by their appointment.

It is possible for the fund to operate in two modes to suit both groups of members — that is, accumulation for the younger member and pension mode for retired members.

Appoint an alternate director

In some instances, an alternate director can be appointed to act in the place of those who have become incapable of fulfilling their role as trustee, perhaps due to illness or mental incapacity. An alternate director can carry out the responsibilities as director of the trustee company.

However, because trust law does not generally allow an individual to pass these responsibilities to another individual, this option is limited to those funds that have a corporate trustee.

This option allows the corporation to continue to act as trustee, while avoiding the additional issues that could possibly be involved in appointing another family member as a trustee (and therefore as a member also).

This approach avoids triggering capital gains for funds still in accumulation mode and allows the members to continue with existing investment choices.

It is possible for SMSF funds that have individuals as trustees to switch to a corporate trustee, but this can be costly.

Appoint an enduring power of attorney

There continues to be debate about the interpretation of the law regarding SMSF trustees and enduring power of attorney.

However, the current legislation suggests it can be used in place of the member.

This would allow elderly retirees to step back from their role and utilise an enduring power of attorney to relieve the burden associated with being a trustee of the fund.

Michael Hutton is head of wealth management at HLB Mann Judd Sydney.