Winding up an SMSF a case of getting steps in right order Time to wind up the fund? LIKE most things, SMSFs are not meant to last forever. At some point they will need to be wound up. It could be because a member has died or because administration fees outweigh the benefits. Unfortunately the steps in an information sheet from the Australian Taxation Office could create more problems than it solves for trustees. One important step not covered by the ATO is selling the investments of the fund. Where an SMSF has investments with large unrealised gains they should be sold while the fund is still in pension phase. If this occurs in accumulation phase the fund will have to pay 10 per cent income tax on the gains made. The information sheet contains a table that details what trustees must and must not do when winding up a fund. It is this table that could cause problems for trustees. The first step shown is for trustees to read the SMSF's trust deed. This is because in most cases the trust deed will set out the process and documentation required for winding up the fund. One of the most important steps on the ATO list is a warning for trustees to make sure they deal with a member's assets and contributions correctly. If a member has preserved benefits, and they have not met a condition of release, they must be rolled over into another super fund and not paid to them. Trustees should not follow the ATO's steps in the order given. Those steps are to: ■ Have an audit conducted of the fund ■ Prepare the final tax return for the fund, and then ■ Notify the ATO in writing within 28 days that the fund has been wound up. Before the audit can be conducted, financial statements must be prepared for the fund. It is these accounts that will show how much each member must either be paid or the value of the benefit to be rolled into another super fund. In addition, as most funds would be wound up during a financial year, it is impossible for trustees to lodge the tax return first and then notify the ATO of it being wound up. This is because the final tax return cannot be lodged until after the end of the financial year in which it was wound up. This means in practical terms the ATO must be notified in writing first of the wind-up and then the final tax return must be lodged. The final point on the ATO don't list is a warning that the bank account should not be closed until after the final tax return is lodged and the assessment issued. As the tax return will not be lodged until after the end of the tax year, and because these accounts in most cases earn interest, the fund will have earned income in the financial year after it was wound up and would need to lodge another return. A solution is for the trustees to obtain firm quotes for the cost of preparing the final accounts and audit of the fund and prepay these amounts. The accountant for the fund should also be able to estimate how much tax and fees will be payable and these can be prepaid. After all of these payments, and the final payments to members, the account can then be closed. If the final tax return results in a refund it can be put in the accountant's trust bank account to pay their fee.