It’s common to assume that once a member decides to wind up their SMSF, it should happen as quickly as possible. After all, everyone likes to avoid unnecessary costs and each additional year means another year of accounting and audit fees, not to mention the ATO’s supervisory levy.

But sometimes slowing down can be important, particularly if there are pensions involved.

Let’s look at a case where the money is being moved to a public fund rather than taken out of super entirely.

Usually the pattern is to rollover 'most of the money' first and then make a final payment once the fund’s final tax refund has been received. If the decision is made to wind up in (say) February 2025, the trustee might hope to make that first transfer in April or May 2025, leaving only a few thousand dollars in the fund at 30 June 2025. While the fund technically stays 'alive' until the tax refund is received, bank account closed etc, it can be possible to ensure that at least the accounting and audit fees stop with the 2024/25 return rather than continuing another year.

In a fund paying a pension, the pension technically has to be commuted so the rollover can take place (only lump sums can be rolled over so the pension firstly needs to be turned into a lump sum). There are two ways this could be approached – and to highlight the difference between the two let’s assume that the fund only has one member, one pension and no accumulation accounts.

Fully commuting the pension

Firstly, the pension could be fully commuted and as much as possible rolled over. The final payment in 2025/26 would then be made from a small accumulation account.

Remember that as soon as the pension is fully commuted, it stops for tax purposes. That means the fund stops claiming a tax exemption on its investment income (this tax-exempt income is often referred to as “exempt current pension income” or ECPI). So this exposes the fund to a very real risk that only income (and capital gains) received before the trustee formally commutes the pension is exempt. If the rollover is happening in specie (ie, the member is transferring their SMSF assets to their new fund rather than cashing them out first), then by definition all of the capital gains realised as a result of the transfer will be realised after the commutation. That means they would normally be taxable.

These days, fortunately, we have a solution. The trustee can elect to claim ECPI using a different method (often called the 'actuarial certificate method' because it requires an actuarial certificate to do it). This method doesn’t actually look at precisely when capital gains were realised, or income received. Instead, the actuary looks at the fund over the whole year and works out (on average) what proportion or percentage of the fund was in pension accounts. If that’s (say) 70%, the actuary certifies that 70% of the fund’s investment income is exempt from tax no matter when it was actually received (before or after the commutation).

But the key here is to actually make the election and ensure the tax return is prepared on that basis.

The fund’s accountant/tax agent should do this proactively but legally, the 'default' for many funds in this position is that it’s not.

Partially commuting the pension

The second approach would be to partially commute the pension and just rollover the partial commutation.

The great thing about that option would be the pension continues and so does ECPI. The capital gains would be realised at a time when the whole fund was still in pension phase – so there’s no need for the trustee to make the election etc.

But there’s also a downside. The minimum pension payment set at the start of the year continues to apply until the pension is fully commuted. So if a little bit of pension account remains for the whole year, you’ll need to take the full minimum pension.

That might be fine in some cases but in others it could mean much more than expected comes out of super. And remember that if the amount moved to a new fund is converted to a new pension in that new fund, a minimum pension amount has to come out of that fund too. (Effectively the combined minimum will double count your super.)

What if there were accumulation accounts?

In that case, the actuarial certificate method would almost certainly be used to work out ECPI.

But this is where really understanding how the percentage is calculated can be invaluable in controlling tax. And it also might encourage you to slow down.

Take a fund where approximately 40% is in pension accounts and 60% is in accumulation accounts. In the normal course of events, the actuary will probably calculate 40% for their certificate.

That means, if a lot of assets are sold realising capital gains, they will be partially taxed.

But the SMSF trustee can get a better result if they’re willing to wait a bit. Let’s say the wind up is being initiated in May 2025.

They could look to transfer all the accumulation balances in the first year (2024/25). Ideally this would draw on as much cash or assets with low capital gains as possible. During that year, the actuarial % would be around 40%.

Early in the following year, the trustee would sell the rest of the assets and make a second large transfer (most of the fund). In that year, remember, all that remains is pension accounts. So the capital gain would be realised at a time when the actuarial % is more like 100% - potentially reducing the tax paid enormously.

This might make going slowly well worth it, even if it results in another year of accounting and audit fees.

And what if the money is coming out of super?

For many people, winding up their SMSF means taking all their money out of super entirely.

There are plenty of good drivers here – for example, a 90-year-old widow whose beneficiaries are adult children might want to avoid death benefit taxes. Some people find their balances decline over time and the SMSF is no longer worthwhile from a cost perspective. And others just decide to simplify their affairs.

All of these could see money moved out of superannuation.

There are things to watch here.

Commonwealth Seniors Health Card

Don’t forget that eligibility for this card is based mostly on taxable income, say from investments outside super. And often, money that’s in super is ignored entirely. For example, if you started your super pensions before 1 January 2015, you can ignore all your super for this card. Those who have a lot of their super in an accumulation account can ignore this as well. Even if your pension started on or after 1 January 2015, you only have to take a “deemed” amount of income into account for the income test on this card.

Moving money outside super could have a big impact on whether or not you’re eligible for the card.

Estate planning

For many people, all the money is going to the same place (the estate) whether it’s currently in super or invested in their own name. So moving large amounts outside the super system won’t disrupt any plans.

But if you’ve carefully arranged to have your super go to one beneficiary but other assets go elsewhere, you need to act with care. These types of arrangement are completely disrupted if the money is moved around during your lifetime. Ideally, you’d fix your Will before taking the money out of super.

Where should the money or assets go?

It’s one thing to say “I’ll take all my money out of super” but it might be quite another to decide where to hold it.

Let’s imagine your SMSF owned a property. The decision has been made to pay it out of the fund in specie (ie by transferring it rather than selling it to someone else). For a start, remember that only lump sums (not pension payments) can be paid in specie. So once again, it would be necessary to fully or partially commute your pension.

But the next step is also important. What if you actually want the property to go to your family trust, or another family member or an investment company? While the benefit has to be paid “to the member”, that doesn’t mean the property has to be transferred to you first and then transferred again (with more stamp duty) somewhere else. You can ask the trustee to transfer the property directly to the right place. It pays to think about this before making the move – and getting the right paperwork in place.

All in all, there are plenty of reasons to think carefully before acting when it comes to winding up an SMSF, particularly where pensions are involved.

Meg Heffron is the Managing Director of Heffron SMSF Solutions, a sponsor of Firstlinks. This is general information only and it does not constitute any recommendation or advice. It does not consider any personal circumstances and is based on an understanding of relevant rules and legislation at the time of writing.

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