Don’t rush to close your self-managed fund – look for alternative solutions. Otherwise, you may miss out on some great opportunities. MICHAEL LAURENCE reports.
By Michael Laurence
The breathtaking popularity of self-managed super — with the number of funds opening each month surging to a long-time high of 3500 after the Federal Government announced vast improvements to the super system — truly overshadows the monthly closure of about 300 DIY funds.
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More than 60,000 new DIY funds have been established since June 2004, according to estimates based on the latest-available tax office and Australian Prudential Regulation Authority (APRA) figures, against about 10,000 fund closures over the same period. These closures are the other side of the DIY super boom.
Super consultants say fund members decide to close their DIY funds for a variety of reasons, including poor investment performance or unacceptably high running costs, which is typically a reflection of a low balance. And some members begin to find the administrative and investment duties somewhat onerous given their lifestyles.
But most funds close simply because all of the members have died and the funds no longer serve a purpose. (In many cases, even the death of the founding members won’t cause the shutdown of a DIY fund — their children and, later, grandchildren become members.)
Tax office statistics appear to suggest that the Government’s remodelling of the super system — including the imminent removal of tax on super retirement benefits — may dramatically slow the monthly closure of DIY funds. (This legislation has just passed through Parliament.)
The majority of members who decide to close their funds usually wait until the last three months of a financial year, yet the closures shortly before the end of 2005-06 were way down on previous years. (The revamping of the super system was announced, of course, in the May 2006 budget.)
On the other hand, this apparent slowdown in the closure of DIY funds may be somewhat countered in the future by the tax office’s determination to get much tougher on wayward funds that are failing to meet their obligations under super law. And as this get-tough policy bites harder, some fund members will inevitably decide they want out.
Alternative to closure
Members who are thinking of closing their funds because of underperformance or because of the workload should think carefully before giving up these highly effective and flexible means to save for retirement, provide retirement income, and to conduct sophisticated estate-planning strategies.
Alan Dixon, managing director of Dixon Advisory — a Canberra and Sydney financial planning group specialising in self-managed funds — says rather than closure, a solution might be for a fund to gain financial planning and investment advice and to look for ways to ease the administrative burden on members.
Within the confines of a fund’s trust deed and superannuation law, Dixon says a member of a fund might be nominated to make all investment decisions, thus reducing the effort required from other members.
Again depending upon the circumstances, arrangements might be made so most members’ signatures are only required on a fund’s annual returns. (With a DIY fund, each member is either a trustee or a director if there is a corporate trustee.)
Dixon says a few people find that they do not have a suitable temperament to have a DIY super fund and are overwhelmed by the investment and administrative responsibilities. “The stress and pressure could upset their retirements,” he says. Such individuals could be better suited by a large, public-offer super fund.
Graeme Colley, superannuation strategy manager for DIY fund administrator Super Concepts, says financial planners and other professionals can advise on whether a fund is viable or whether it should be wound up. “And a good financial planner should be able to recommend whether a client is a suitable person to be running a self-managed fund.”
Colley says some members of self-managed funds can simply lose interest in them. Like Alan Dixon, Graeme Colley emphasises that some members of self-managed funds should consider relying more on the skills of professional advisers to complement their own abilities as a possible alternative to closing their funds.
Six steps to closure
In most cases, professional advisers guide member/trustees through the various steps that should be taken to comply with superannuation and tax laws, and a fund’s trust deed, when closing a fund.
The types of assets held by a DIY fund will partly dictate the ease in which it might be closed. Colley points out that a fund could find, for example, that the business premises of the members — a common DIY fund asset — takes some time to sell.
Here is quick guide to closing a DIY fund:
Step one: Formally decide to close your fund. The members should record their decision in writing.
Step two: Select the best time to close your fund. Typically, funds should not be closed soon after the start of a new financial year because the expense of preparing the final regulatory and tax returns will only cover a short time. And the target closure date should be set well ahead to give members plenty of time to make the necessary arrangements.
Step three: Calculate the fund’s assets and liabilities. Pay liabilities and expenses such as taxes, administrative costs (including for winding up the fund) and regulatory fees.
Step four: Distribute the fund’s remaining assets to members. This may involve paying lump sums to some retired members or rolling benefits into another super fund. “It’s useful to get these instructions in writing from members just in case there’s a misunderstanding in the future,” suggests Colley.
He points out that some retired members may want actual assets currently held in the DIY fund — such as real estate or certain shares — transferred into their own names.
Step five: Lodge final regulatory and tax returns to the date that the fund is being wound up.
Step six: Don’t ditch fund records. Superannuation law requires that most records be kept for 10 years.