Setting up self managed super fund (SMSF) are an increasingly popular way for people to save for retirement. It’s not hard to see why. Their flexibility and investment options are greater than other industry super funds. However, many are concerned about the set up process.
Key takeaways
SMSFs can have an individual or corporate trustee structure.
An SMSF won’t be officially recognised until an initial contribution is made.
Register the SMSF with the ATO. This requires a TFN and an ABN.
The SMSF needs its own bank account to process financial transactions.
An electronic service address allows the fund to receive rollovers and employer contributions.
The SMSF needs an investment strategy to govern investing decisions.
Trustees must consider the risks of a lack of diversification.
Decide on your SMSF structure
There are two basic structures that an SMSF can use: Individual trustees and a corporate trustee. The structures function differently and have their own requirements.
Individual trustees
Multiple members can join one SMSF. Every fund member must be an SMSF trustee. The rules around how many members a fund is permitted to have vary from state to state. Some states permit as many as six. However, in Queensland, SMSFs are only allowed up to four members. No member can be an employee of another member, unless they’re related. If you’re setting up a single-member fund, you must appoint a second, non-member trustee.
Corporate trustees
Corporate trustees are favoured by roughly 66% of SMSFs currently operating. In this structure, a company is formed to act as the fund’s trustee. The members become directors of the company. This means that the members must apply for a Director Identification Number.
A corporate trustee structure has certain advantages over individual trustees. For one, Queensland law permits a full 6 members under this structure. In a single-member fund, you’re not required to take on a second trustee. A downside is the upfront costs. The Australian Securities and Investments Commission (ASIC) charges a fee for the initial setup for the corporate trustee. ASIC will provide the corporate trustee with an Australian Company Number (ACN) after registration. There’s also an ongoing cost for annual reviews.
Appointing trustees
A party must meet specific criteria to be eligible as a trustee for an SMSF:
Be at least 18 years of age.
Not be subject to a legal disability such as a mental incapacity.
Not be a disqualified person. A person may be disqualified from holding a trustee position if they’re considered a future risk to retirement savings. This could be because they are bankrupt or insolvent, or have been convicted of dishonest dealings.
Research their legal obligations to the SMSF. A Trustee Declaration must be signed within 21 days of appointment, acknowledging that trustees of the SMSF understand their responsibilities.
Setting up self managed super fund
Once you’ve decided on the best structure, it’s time to create the actual fund. This involves understanding eligibility criteria, meeting governance requirements, and setting aside assets.
Meet residency requirements
An SMSF must meet three criteria throughout the financial year to meet residency requirements:
The SMSF must either have been established in Australia or possess at least one asset that’s located in Australia at all times. A fund is taken to have been established in Australia if the initial contribution is made in the country.
Major strategic decisions and duties when operating the fund must typically occur within Australia. This includes activities such as drafting the investment strategy and performance reviews.
Any active members must be Australian residents and hold at least 50% of either:
The fund’s total market value.
The amounts payable to members if they decide to leave the fund.
Create the trust deed
A trust deed is a legal document that defines the rules around how the SMSF will operate, in accordance with superannuation laws. The deed must be tailored to the specific objectives of your fund, and maintain that the fund’s sole purpose is to pay retirement benefits to the members or other nominated beneficiaries if a member dies.
Your trust deed should include the following details:
The name of the trustees.
The rights of the members. For example, how will amendments be made? How will you choose investments?
How the SMSF will pay benefits. Will members receive a lump sum or an income stream?
What happens if a member dies or is incapacitated?
Beneficiaries may be nominated to receive the benefits in the member’s stead.
Establishing an enduring power of attorney ensures that an SMSF can continue to comply with superannuation law if a trustee can no longer meet their obligations personally.
The circumstances that would require the fund to be wound up such as:
All members wish to leave the fund.
Investments are performing poorly.
A member can no longer manage super fund obligations.
The SMSF no longer meets residency requirements.
All trustees must sign and date the document and ensure it always adheres to the appropriate regulations.
Initial contribution
Before the SMSF is legally recognised, it must assign assets. A small initial contribution of $10-$20 will suffice. This nominal amount must be assigned to a member. Making this small contribution is particularly useful if you expect a rollover from a different superannuation account or a member’s contribution that hasn’t been confirmed.
Register with the Australian Taxation Office (ATO)
Once you’ve legally established the SMSF, you have 60 days to register the fund with the ATO. If you fail to complete registration within the allotted time, the fund won’t be an ATO-regulated SMSF. This means it won’t benefit from tax concessions.
A new SMSF will need a tax file number and an Australian Business Number. Once the SMSF is registered, it will appear on Super Fund Lookup.
Open an SMSF bank account
A bank account is necessary to manage the fund’s operations. Creating a bank account for the SMSF is required for:
Receiving contributions and rollovers.
Retaining the profits of any assets.
Separating the SMSF’s finances from personal assets or assets associated with a related party.
Paying any liabilities arising from the operation of the fund.
To open an account for the SMSF, the bank will need the fund’s TFN and ABN and documentation identifying all members and their addresses. A corporate trustee must provide its ACN. The ATO must be informed of the fund’s bank details. Trustees can keep the ATO updated through their online services.
Member accounts
Members don’t require individual bank accounts. However, it’s important to keep track of each member’s financial activities. A member account should track contributions made by each member or on their behalf, investment earnings attributable to each member, and any super benefits paid out.
Get an electronic service address
An electronic service address (ESA) is legally required to use the SuperStream standard. SuperStream allows the SMSF online access to contributions from employers and to accepting rollovers. It also speeds up the use of a release authority to release a member’s super.
You can get an ESA through a messaging provider. Ensure you engage a messaging provider that offers rollover services. You must notify the ATO of your ESA.
Draft an investment strategy
Before you begin investing through your own SMSF, you must understand the requirements around investment decisions. SMSF investments must:
Comply with the fund’s trust deed and super laws.
Show clear legal ownership by the SMSF.
Reflect the actual market value.
Align with the SMSF’s sole purpose requirement.
Your investment strategy must be a written document that undergoes regular reviews. It outlines how investments will be chosen in service of your retirement goals. It’s recommended to get professional advice to ensure your strategy meets all of its obligations. FAA is available to provide you with the expert financial advice you need to draft the right strategy for your circumstances. Details that the strategy should consider include:
Investment risks and predicted returns.
The fund’s diversification.
The liquidity of the fund’s assets.
The required insurance coverage for each member.
The retirement needs of each member, which may affect their risk appetite.
Diversification
While you may invest entirely in a single asset class, spreading risk through diversification is strongly recommended. If you decide to forgo diversification, the investment strategy should document that you considered the risks. You should also detail how, based on your financial situation, your investment strategy will achieve your fund’s goals by securing appropriate returns and satisfying cash flow needs.
For example, investing in commercial or residential property can be an exciting opportunity unique to SMSFs. Properties also create complications.
Illiquidity. Property can deliver significant capital growth over the long term. However, they can take a long time to sell. This has implications for funds that are disproportionately exposed to the property market.
Ongoing costs. After acquisition, properties can incur ongoing expenses that affect returns. This can cause issues if the investment isn’t incorporated into the overall strategy appropriately.
Managing these risks is important to ensuring that decisions around diversification are serving the fund’s members.
Strategy reviews
Conduct regular reviews, at least once a year, to ensure your strategy continues to serve the best interests of all members. Particular situations warrant an immediate review:
Corrections in the market.
A new member joins the fund, or an existing member leaves.
When a member begins receiving benefits. Trustees must ensure that the SMSF has the liquidity to pay out the necessary money.
Any reviews should be recorded in the minutes of the annual trustee meeting. Note what decisions you came to, and any changes that were implemented. These records can be submitted as evidence to your auditor.
Strategy non-compliance
An SMSF’s strategy and financial statements are audited every year to determine whether the fund is in line with its investing strategy. If the fund is found to have breached its requirements, such as lacking adequate diversification, trustees must amend the strategy to fix these issues.
SMSFs are restricted from purchasing assets from, or lending money to, any of the fund’s members. For example, a member with an existing residential investment property may not have that property transferred to the fund.
Auditors must document evidence of non-compliance in an auditor contravention report. This report is submitted to the ATO.
From our clients
The FAA team helped us with setting up a SMSF and Property Purchase under their Excelsior Program. The team is a one stop shop for as much or little as you want to help with your Financial Planning, and have always conducted themselves in a very respectful, professional and impartial manner. Always contactable, easy to reach and very efficient in their communications.
There are many steps to consider if you want to set up an SMSF. As our clients can attest, FAA is the one-stop shop that will assist with your fund from beginning to end. Our team of professionals help clients navigate setup and compliance matters efficiently. We will work with you to organise your SMSF depending on your personal objectives.
Conclusion
An SMSF offers you unparalleled access to a wealth of investment options and control as a trustee. However, there’s a lot to consider when setting up your fund. Once you’re ready to take on assets, it’s important to understand your ongoing compliance obligations. A simple breakdown of the entire process will help you effectively meet the necessary requirements and protect your retirement savings.
FAA has decades of experience helping clients achieve financial freedom. Contact us for assistance.