Everything You Should Know About Setting Up A SMSFamir@propertytaxspecialists.com.au
A self-managed superannuation fund (SMSF) is a type of super fund that gives the investor greater control over their retirement savings and investments, compared to other types of superannuation structures – such as public or industry funds.
However, setting up your own SMSF can be tricky. There are plenty of benefits to enjoy, but the process is often complex and confusing.
So, in this blog post, we will cover general information on what you need to know about setting up an SMSF, including what compliance regulations you need to satisfy and how much it will cost.
Setting Up a Self-Managed Super Fund: What Should You Consider?
Before deciding whether setting up an SMSF is right for you, there are many compliance requirements you should be aware of before starting the process. Some things that you need to consider include:
- You’re in the driver’s seat when it comes to managing your SMSF, which means you have to formulate an investment strategy, decide on the level of risk you’re willing to take on and choose your investments.
- Consider a minimum balance of $500,000 (as recommended by the Australian Securities and Investments Commission), but in some cases, it can be $200,000. Generally, an SMSF with investments of less than $200,000 may not be the most cost-effective structure (the cost of managing the SMSF will outweigh the cost of investing through the SMSF).
- All your decisions need to satisfy the sole purpose test. In other words, every investment decision you make should solely be for the retirement benefit of the SMSF members.
- The members of the fund are also trustees.
- There are certain investment restrictions when it comes to purchasing residential property and commercial property.
- You need to meet a range of financial reporting obligations, including preparing annual financial reports and member benefit statements, lodging income tax returns, and appointing an independent auditor to undertake an annual audit.
So, while an SMSF offers a great degree of flexibility and control, there are also several obligations that you need to satisfy, which can be time-consuming and expensive. Therefore, it’s important to weigh up all your options and seek professional advice to ensure you choose the right path.
Steps to Setting Up an SMSF
Before you start the process GET advice from an authorised advisor and get a Statement of Advice (SoA).
The following steps provide an outline of the key activities involved in setting up an SMSF:
- Choose an appropriate trustee structure for your fund
- Appoint trustees (individual or corporate trustees)
- Establish your SMSF with a trust deed
- Lodge an election to be a regulated fund with the Australian Taxation Office (ATO)
- Set up a bank account for the SMSF
- Determine how you will run your fund by implementing an investment strategy
- Obtain insurance cover for members.
Establish a Trust and Obtain the Trust Deed
The first three steps of setting up an SMSF involve establishing a trust. Although the SMSF is technically a superannuation fund, it is also a type of trust structure. In other words, an SMSF is set up for the sole purpose of providing retirement benefits to its members (or beneficiaries). So, you need to set it up in the same way you would any other trust structure.
An SMSF is therefore subject to your relevant state or territory’s trust laws.
Establishing a trust involves appointing trustees, identifying fund members and creating an SMSF trust deed. As part of the operation of the superannuation fund, the trust deed outlines the rights and obligations of the various parties. The trustees, the members, and anyone else who is entitled to benefits from the fund must comply.
While you should consult a legal professional to help you set out the trust deed, the following clauses are what you can expect to include in a trust deed:
- Who are the trustees and SMSF members are
- Trustee rights
- When and how benefits are paid to members
- Type of income streams
- When and how the SMSF should be wound up
Once the trustees have been appointed, the members identified, and the trust deed implemented, the trustees also have to sign a declaration in which they acknowledge their duties and obligations. The trustee declaration must be according to the ATO form and completed within 21 days of becoming a trustee.
It’s worth noting that the appointed trustees are personally liable for any decisions that make in relation to the fund’s operation. This means that they will be liable for penalties imposed for non-compliance.
Lodging an Election and Opening an SMSF Bank Account
Once the SMSF has been established, the trustees have 60 days to lodge an election to be regulated by the ATO. Self-managed super funds differ from industry funds in that they’re regulated by the ATO, not by the Australian Prudential Regulation Authority (APRA).
So, if the election notice isn’t lodged, there are certain tax implications, your fund will not be compliant for taxation purposes, and you won’t be entitled to the concessional taxation treatment at the rate of 15% as a complying fund. Instead, the SMSF will be taxed at the highest marginal rate.
Self-managed superannuation funds also have to apply for a tax file number and an Australian Business Number.
After the compliance steps have been met, you’ll need to open a separate bank account so the SMSF can receive contributions (including employer contributions) and investment income and pay the necessary fund expenses.
Implementing an Investment Strategy and Taking Out Insurance Cover
Once the SMSF has been established, the trustees must prepare an investment strategy. The investment strategy should be in writing and include:
- How the fund plans to invest (i.e. what types of asset classes is it going to invest in?),
- A liquidity plan (i.e. how the assets can be converted to cash to meet expenses),
- The risks involved in using the fund as an investment vehicle,
- How the fund plans on being able to pay each member’s benefits, and
- Whether to hold insurance cover (such as life, permanent or temporary incapacity insurance) for each member of your SMSF.
However, the investment strategy isn’t a static document and must be reviewed so that it continues to reflect the member’s needs and circumstances.
Another aspect of the investment strategy that trustees need to consider is taking out insurance policies for each member. Taking out insurance for each member will secure savings and investments should any unfortunate events occur.
How Can Property Tax Specialists Help?
While we have given you a basic overview of the set-up process for SMSFs, each step has its own complexities. So, you’ll need to assemble a team of experts who can give you the appropriate personal financial advice, help you administer the fund, select investments, and manage its tax obligations.
At Property Tax Specialists, our team is dedicated to providing high-quality advice on the best way to manage and structure your portfolio of investment properties. We will help you maximise your returns and avoid unnecessary taxes.
Our team has experience in complex investment portfolios and understands the best way to structure them, allowing you to protect your assets and legally pay less tax! If you have multiple investment properties or have invested using your SMSF, don’t hesitate to get in touch with one of our experts, who will be happy to answer any questions or queries.
DISCLAIMER: This information has been prepared without taking into account your objectives, financial situation or needs. Because of this, you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation, or needs.
Amir Ishak is a Limited Authorised Representative 1269908 of Merit Wealth Pty Ltd, Australian Financial Services Licence 409361, ABN 89 125 557 002