Advice related to the creation of an SMSF needs to include a discussion about the possible closure and wind-up of the fund to avoid potential legal and compliance issues in the future, according to an SMSF adviser.
AMP Advice private client adviser Peter Crump said this type of discussion should raise issues around an orderly closure of the fund, but what might also happen if the fund fails or a member/trustee has to be removed from the fund.
“The reason for this discussion is because you are providing them with a product, a SMSF, and are providing it for particular purposes, but you need to indicate there are ways this can fail, and if the SMSF no longer functions or does not achieve its purpose and has to be wound up, what are the potential detrimental consequences,” Crump said at the recent SMSF Association 2020 National Conference on the Gold Coast.
“We owe it to clients and we spend a lot of time framing the operation of SMSFs as a wealth-creation and wealth-maintenance strategy, and even a succession strategy, so it is just as important that we spend time explaining how it can go wrong and being mindful that at some stage every SMSF will cease to exist.”
Crump noted the Australian Securities and Investments Association’s Report 575, which reviewed the quality of SMSF-related financial advice, highlighted the need for SMSF advisers to address the issue of the wind-up of a fund and “if you are not doing that, you leave yourself personally liable and in the eyes of ASIC as having not properly educated the person on the end-to-end operation of the SMSF”.
He encouraged conference attendees to include any discussion about an exit strategy as part of an annual review with clients, even if they never recommended the establishment of the fund in the first place.
The discussion should cover what might cause a fund to be wound up, as well as what processes and procedures can be put in place to mitigate potential taxation or cost issues that might occur, he added.
“By educating our clients on those issues we enable them to better understand the pathway forward, which may involve not just the members of the fund, but also their children, who are likely to be the ones who will ask ‘What is happening?’ and ‘Why did we not know this would happen?’” he said.
“Death and taxes are a certainty in life and also for SMSFs, and we know it is going to happen, so have an exit strategy available and know how it is going to work and frame the fund the right way in terms of its tax structure, but also document these discussions because if you are not documenting them, they never existed.”
