Expert SMSF insights
Setting up an SMSF – 7 key steps
By Graeme Colley
People are drawn to self-managed super funds because of the control it gives them, particularly when it comes to investing. If you’ve weighed the pros and cons and are interested in establishing your own SMSF, then let’s look at the setup process using the case of Thomas.
Aged 51, Thomas is married to Carla and has three children nearing adulthood. His superannuation has been accumulating in an industry fund he started when was 17, and for the most part he’s given it little thought.
Recently however, he’s become increasingly aware of retirement planning and, with his children becoming independent, he feels it’s the right time to take greater control of his superannuation.
Before Thomas jumps into establishing an SMSF, he needs to know what’s involved and whether it’s the right move for him. As trustee, he’ll be responsible for ensuring the fund complies with superannuation and taxation laws.
An SMSF is nothing more than a tax structure, and to be eligible for tax concessions Thomas must ensure his SMSF is established correctly.
Decide the fund’s structure
Firstly, Thomas must determine the fund’s structure.
An SMSF can have up to four members (which may increase to six per the 2018 federal budget) and a trustee.
Thomas has the choice of individual trustees (who ordinarily must be members of the fund), or a corporate trustee (the directors of which would ordinarily be members of the fund).
Should Thomas be the fund’s sole member, he must have an additional individual trustee (who is not required to be a member), or he could be the sole director of the corporate trustee.
Trustees (or directors) need to be legally appointable as SMSF trustees (i.e. they are not minors, do not have dementia etc).
Understand the responsibility involved
Thomas, as trustee, has duties and responsibilities he needs to understand. He is ultimately responsible for the SMSF and its compliance with the relevant laws. Thomas must consent to being appointed as trustee (or director) and acknowledge that he is aware of his duties and responsibilities by executing a declaration within 21 days of being appointed.
Establish a trust deed
An SMSF is established under a trust deed, a legal document that sets out the rules for the establishment and operation of Thomas’s SMSF. The deed must be executed by all parties of the SMSF (i.e. members and trustees). The SMSF is bound by the deed and superannuation laws, known as its governing rules.
To establish Thomas’s fund, assets must be set aside for the benefit of members. To facilitate this (prior to Thomas’s benefits being rolled into the fund) a nominal amount, of say $10, can be held with the deed which is then allocated as a contribution to Thomas. In some states, the trust deed may need to be stamped.
At this point, Thomas has now established the SMSF and appointed trustees.
Register the fund for taxation purposes
As a trustee, Thomas now has 60 days to register the fund with the Australian Taxation Office and apply for an Australian Business Number and Tax File Number. As part of this application process, the trustees must elect for the SMSF to be regulated to obtain the tax concessions available.
Setup a bank account
Thomas will be required to establish a bank account for the fund, to receive all contributions, rollovers and investment income, and to pay pensions (if applicable) together with general fund expenses. Thomas will need to ensure the account is in the name of the SMSF trustees and that it’s kept separate from the trustee’s individual bank accounts.
Make arrangements for transfers and contributions
Once the bank account is established, Thomas is able to arrange for his existing super to be transferred to his SMSF. He can also ask his employer to pay contributions to his SMSF.
Determine an investment strategy
Prior to the trustees investing contributions, it is a requirement that they develop an investment strategy for the SMSF. Thomas needs to document the strategy and continually review it to ensure it is, always, meeting the objectives and needs of members. Thomas would need to consider the personal circumstances of all fund members, expected risks and returns of fund investments, risk tolerance of members, benefits of investment diversification, asset classes and allocation, liquidity, members’ insurance requirements, and the ability of the fund to pay benefits to members in their retirement.
So – that’s it in a nutshell
Thomas established an SMSF to gain greater control. He’s now able to directly decide how his superannuation is invested, with a wider choice of investments compared to his old industry fund.
There are many more benefits to establishing an SMSF and these will range depending on an individual’s circumstances.
Always remember, an SMSF is established for the sole purpose of providing for your retirement, or for your beneficiaries in the event of death. It is your money, but not quite yet!