It’s important to set up an SMSF correctly to avoid penalties and to ensure that it runs smoothly.
SMSFs that are set up correctly are eligible for the tax concessions that superannuation legislation provides. Member contributions and fund earnings are taxed at the concessional super rate of 15% in Australia (up to certain contribution limits).
Should you set up an SMSF yourself or get help?
It’s possible to set up an SMSF yourself, but it’s wise to get independent professional advice. Depending on your own level of SMSF and investment knowledge and expertise, you may need the services of an accountant, a lawyer and a financial planner to help you set up your fund.
There are plenty of professional SMSF service providers available. They can be broadly divided into two categories:
- Those that provide a specialist SMSF service (such as legal, taxation, auditing, administration or investment advice).
- Those that provide a ‘one-stop shop’ that integrates all the SMSF services outlined above (i.e. integrated service providers).
The SMSF set-up process
Below is a nine-step process for setting up your SMSF.
Step 1: Choose your SMSF members
An SMSF can currently have up to four trustees/members.
It’s important that fund members (and the fund itself) can satisfy the following residency conditions:
- The fund will be established in Australia or will have at least one Australian-based asset.
- The central management and control of the fund will generally happen in Australia.
- Active members of the fund must be Australian residents who will hold at least 50% of its total assets.
These conditions must be met so that your SMSF will qualify as an Australian super fund and therefore be eligible for the tax concessions available under Australian superannuation legislation.
Step 2: Choose your SMSF structure
An SMSF must be set up as a trust. A trust is a legal arrangement where trustees manage assets on behalf of beneficiaries (the SMSF’s members). Every member of an SMSF must be either an individual or a corporate trustee.
If you choose to have a corporate trustee structure, each of your SMSF members must be a director of the company concerned. The company must be registered with the Australian Securities and Investments Commission (ASIC).
ASIC charges company registration and annual review fees for SMSFs with a corporate trustee structure. However, it can be easier for these funds to record and register assets if there is a membership change. Funds with an individual trustee structure can find it more expensive and time-consuming to change asset ownership in these circumstances.
All SMSF trustees are ultimately responsible for ensuring the fund’s ongoing legal compliance with superannuation and taxation legislation. They must sign a trustee declaration that indicates they understand their legal compliance obligations, which includes their annual fund auditing, reporting and taxation obligations to the Australian Taxation Office (ATO).
Step 3: Create your SMSF trust deed
An SMSF trust deed is a legal document that outlines how the fund will be established, how it will operate, and how it will be administered. This deed should be written so that it is compliant with superannuation legislation. It should include important information such as:
- The names of the members/trustees.
- The fund’s objectives. An SMSF needs to satisfy the sole purpose test. This means that it must be set up and maintained for the sole purpose of providing retirement benefits to its members (or to their dependants if any of the fund members die before retiring).
- Whether member benefits will be paid as lump sums or income streams.
An SMSF trust deed must be signed and dated by all members/trustees.
Step 4: Apply for an Australian Business Number (ABN) and register your fund with the ATO
All SMSFs must be registered with the ATO within sixty days of being established. This is done by completing and submitting an ABN application form to the ATO. You can do this yourself, or a tax professional can do it on your behalf. The ATO will provide your fund with a tax file number upon approving the application.
Step 5: Set up an SMSF bank account
An SMSF needs to have a bank account that is separate from its member’s individual accounts. This SMSF account should be used for receiving all member contributions and paying all member benefits. The ATO should be advised of the account details.
Step 6: Get an electronic service address and arrange for member contributions and rollovers
This address will allow your SMSF to receive member contributions paid on their behalf by their employers. Employers must transfer these payments electronically using a system called SuperStream.
Arrangements for member contributions (including any rollovers from other funds into the SMSF) should be organised as part of the set-up process.
Step 7: Create an investment strategy and make your initial investments
It’s a legal requirement for SMSFs to have a documented investment strategy. This investment strategy should satisfy the sole purpose test and be used to guide trustee decision-making.
Important factors to consider when developing an SMSF investment strategy include:
- The individual characteristics of fund members (e.g. their age, current financial situation and risk profile).
- The benefits of diversifying the fund’s investments to reduce risk. The major investment options are fixed interest products, shares and real estate.
- How easily its assets can be converted to cash to pay future member benefits when required.
- The current insurance needs of members to ensure appropriate coverage is arranged.
Once this strategy has been created, the fund’s initial investments can be made.
Step 8: Create an exit strategy
An exit strategy outlines how the fund will be wound up. It’s important to prepare this strategy from the outset to help avoid any potential member disputes later on. SMSFs may need to be would up in the future for several reasons, including:
- The trustees no longer wanting to have the ongoing administrative burden of managing the fund. For example, due to age or health reasons.
- The fund’s assets reducing over time to the point where it’s no longer cost-effective to maintain it. There can be significant administration and annual audit costs associated with running an SMSF.
- A relationship breakdown occurring between fund members.
- When all fund members have passed away or have been paid all their entitlements.
- If all the fund members want to transfer their entitlements to another super fund (such as an industry or retail super fund).
- Fund members wanting to relocate overseas and no longer being Australian residents for tax purposes.
The exit strategy should ensure that all trustees:
- Can access all SMSF records and accounts.
- Have binding death benefit nominations in place (and make provisions for these nominations to be reviewed every three years).
- Consider appointing an enduring power of attorney.
Step 9: Appoint an auditor (and potentially an administrator and an actuary)
It’s a legal requirement for SMSFs to be audited by an independent SMSF auditor licensed by ASIC, so you should consider appointing your auditor as part of your SMSF set-up process. You should also consider whether:
- To appoint an administrator to manage your fund when it is up and running, especially if you don’t have the time or expertise to do it effectively yourself.
- You need the services of an actuary to work out any member pension entitlements.
Setting up an SMSF correctly helps to ensure legal compliance so that the fund is entitled to receive the tax concessions available under Australian superannuation law. It also helps to ensure that the fund can operate as smoothly as possible. It’s best to seek independent professional advice before deciding whether setting up an SMSF is appropriate for your circumstances. The information contained in this article is general in nature.