Setting up and operating an SMSF is a major financial decision, as the responsibility for running the fund and complying with the law rests solely with you as the trustee.
While SMSFs are great for some people, they don’t necessarily suit everyone. When deciding to set up an SMSF, there are a number of things you should consider:
- Do you have the time, knowledge and skill to manage your own super fund, as well as the assets and money to make the fund viable?
- Have you compared the costs and benefits of running an SMSF with those of other retirement saving options?
- Are you setting up the fund solely to pay retirement benefits to members or the members’ dependants if the members die?
- Do you understand what’s involved in managing your own fund and what it means to be a trustee?
Once you have decided to set up an SMSF, and how it should be structured, it’s important that it is set up correctly so that:
- It is a complying fund and qualifies for tax concessions
- You protect your retirement savings
- You avoid penalties
- Your fund is able to pay specific benefits
- It is as easy as possible to administer
As all SMSFs are trusts, there are certain steps you must follow under trust law to set up your fund correctly. These can be summarised in four key steps:
1. Establish a Trust
In order to establish the trust, you need to obtain a trust deed that sets out the rules for establishing and operating your fund. Together with the super laws, the trust deed details the powers, duties and responsibilities of the fund’s trustees; the rights of the members; and the scope of the operation of the SMSF.
The trust deed must be tailored to your fund and correctly drafted to meet its objectives and the members’ needs. Once you've decided on the type of trustee(s) for your fund, the next step is to appoint them. New funds usually appoint trustees under the fund’s trust deed. Remember, for your fund to be an SMSF, generally all members of the fund must be trustees or directors of the corporate trustee.
2. Register with the ATO
Once your SMSF is legally established (by executing the trust deed and setting aside assets for the benefit of members) and all trustees have signed a trustee declaration, you must register your fund with the ATO. When registering with the ATO, you should elect for it to be regulated in order for your fund to be a complying fund and receive tax concessions.
This election needs to be made within 60 days of establishing your SMSF. Once your SMSF has been registered with the ATO, a TFN and ABN will be allocated to the fund.
Where the annual turnover of the fund exceeds $75,000, your SMSF needs to be registered for GST. Annual turnover does not include contributions, gross income from financial supplies (including interest and dividends), residential rent or income generated outside Australia. It does include gross income from the lease of equipment or commercial property.
3. Open a bank account
You need to open a bank account in the name of your SMSF (not your name or any other entity’s name) to manage the fund’s operations and to accept cash contributions and rollovers of super benefits. Contributions and rollovers are deposited into the fund’s account, which is then invested according to the fund’s investment strategy and used to pay the fund’s expenses and liabilities.
Earnings on fund investments are also credited to the fund’s bank account. This account must be kept separate to each of the trustees’ individual bank accounts and any related entity’s bank accounts.
4. Prepare an investment strategy
Before you start making investments, you must prepare an investment strategy. Your investment strategy should be in writing so you can show your investment decisions comply with it and the super laws.
An investment strategy sets out how you plan to achieve the fund’s investment objectives. It provides you with a framework for making investment decisions to increase member benefits for retirement. While a financial adviser can help with the preparation of an investment strategy, the trustees remain responsible for managing the fund’s investments.
While there is no prescribed format for the investment strategy, it must consider and reflect the following:
- diversification (investing in a range of assets and asset classes)
- the risk and likely return from investments, to maximise member returns
- the liquidity of fund’s assets (how easily they can be converted to cash to meet fund expenses)
- the fund’s ability to pay benefits when members retire, and other costs the fund incurs
- the members’ needs and circumstances
We strongly advise you seek the assistance of a qualified SMSF Specialist when it comes to setting up an SMSF. For more comprehensive education, information and resources for your SMSF, visit the Trustee Knowledge Centre.