10 steps to setting up self managed super

By Bernadette Chua |

Superannuation

SMSF

Self managed super funds (SMSFs) are for people who want to be more engaged with own retirement savings. They are great for those in business – you can, for instance, purchase an office then lease it back. But they come with responsibilities. After all, the term DIY has a D in front of it, and that stands for Do.

Here are the 10 steps to setting up self managed super accounts, compiled with input from the Australian Taxation Office and SMSF Association.

Step 1: Consider all your options.

And when you’ve considered them, consider them all again. You don’t need to jump in straight away. Self-managed super is not necessarily for everyone and just because your friends and colleagues are setting one up, it doesn’t mean you have to follow them. SMSFs might sound like a nice idea but it takes rigour, compliance and vigilance to do it successfully. After all, your retirement savings decision is one of the most important financial decisions you will ever make in your life. If you’re not confident you can get a better result from an SMSF, and if you don’t have the time or energy to put into monitoring it, you may be better off with a different type of fund. Seek appropriate professional advice from your accountant or financial planner. If you go outside of your existing financial service providers, make sure that person is well accredited. Are they a member of the SMSF Association, for example? It’s worth asking that question and finding out.

To establish a competitive fund you need to be able to access considerable funds to invest, and you need to be willing to put your own effort into managing the fund, even if you have professional help. Remember that if you need to consult from time to time with professionals and advisers, their services will add to the cost of managing your fund. Do a scoping exercise on the risks and laws of setting up self managed super funds, and make sure you understand them. All financial decisions carry risk, so it’s important to think carefully about your investment options to balance the level of risk against the level of financial return. Think about your investment horizon, and how far away you are from retirement age. What can you conceivably achieve from your fund in that time, and how much better do you think the performance would be over your existing fund? Maybe you should make a list of reasons you are setting up your fund, and go through them again. Do you really think you can do a better job of creating a retirement nest-egg for yourself than investment professionals?

You also need to be sure your super investments are legal, and that your plans for your SMSF comply with the ATO regulations. Remember that the ATO regulates the SMSF sector, not ASIC.

Step 2: Understand the responsibilities of a trustee.

When you set up an SMSF you become a trustee, or the director of a company that is a trustee. You need to understand the responsibilities and obligations of the trustee, and decide if you have the time and diligence to do that role yourself, or if you want to appoint a professional to carry out some of those tasks for you. A trustee is responsible for running the fund and acting in the best interests of its members. As a trustee, you need to manage the fund and its investments separately from your own affairs.

A lot will depend on how much involvement you want to have with your fund, a decision which is entirely up to you. If you want to do everything yourself, then you will have to keep good records of all your transactions. You will need to prepare financial statements and tax returns. Of course you can utilise the services of professionals in this area, so you don’t necessarily have to do the administration and the record keeping yourself. But you need to remember that while you might employ professionals to do this work for you, you will still be liable for what they do. And the more you outsource to them, the more the costs of running your own fund will increase.

This mix of professionals may include a tax agent to help you prepare accounts, a fund administrator to help you manage the day-to-day running of your fund and meet reporting obligations, a legal practitioner to review and update your fund’s trust deed, and a financial adviser to assist with your investment strategy. Call them Team SMSF if you like.

Even if you outsource a lot of this work you still need to be aware of your legal obligations as a trustee, make sure that proper records are being kept and that a proper and legal investment strategy is being pursued. Once you set up an SMSF, the buck stops with you, and you need to be comfortable with that!

Step 3: Decide on the structure of your fund.

There are several options to consider. The structure of the fund can be tailored with specific measures in place, to address issues such as blended families, for example. So if you have remarried and there are children from the second marriage, there may be some complex estate planning issues to consider. In the event of your death you may want your assets divided in a very particular way between your spouse and children, so this may require some very careful crafting of your fund’s structure.

Under ATO regulations, a fund can have one of two structures: up to four individual trustees; or it can appoint a corporate trustee (essentially a company that acts as trustee for the fund). Your choice of trustee will make a difference to the way you administer your fund and the types of benefits it can pay, so you need to make sure it suits your own circumstances. The ATO recommends you discuss your trustee options with an SMSF professional.

If your fund has individual trustees, it’s an SMSF if all of the following apply:

  • it has four or fewer members
  • each member is a trustee
  • no member is an employee of another member, unless they’re related
  • no trustee is paid for their duties or services as a trustee

If your fund has a corporate trustee, it’s an SMSF if all of the following apply:

  • it has four or fewer members
  • each member of the fund is a director of the company
  • each director of the corporate trustee is a member of the fund
  • no member is an employee of another member, unless they’re related
  • the corporate trustee is not paid for its services as a trustee
  • no director of the corporate trustee is paid for their duties or services as director in relation to the fund

Step 4: Make sure you (and other members) are eligible to be trustees.

There are very strict rules on who can be a trustee, and all members of the fund need to be trustees (if you choose the individual trustee route) and be eligible. In general, anyone who is 18 years or over can be a trustee of a super fund, as long as they are not under any legal disqualification – such as if they are a bankrupt or legally considered mentally impaired – or if they are what the ATO calls a disqualified person. Penalties can apply if you act as a trustee while disqualified.

The ATO classifies someone as disqualified if they:

  • have ever been convicted of an offence involving dishonesty
  • have ever been subject to a civil penalty order under the superannuation laws
  • are considered insolvent under administration
  • are an undischarged bankrupt
  • have been disqualified by a regulator, either by the ATO or by the Australian Prudential Regulatory Authority (APRA)

If you have been convicted of offences involving dishonesty, you can appeal to the ATO to have that disqualification lifted so you can become a trustee. You can write to the Taxation Commissioner and explain your circumstances. Perhaps the offence was a minor one and occurred a long time ago. The ATO does have the discretion to make a ruling, and the Commissioner has said that it can look favourably on cases which have attracted a jail sentence of less than 10 years.

It is probably wise at this point to ensure that all your other tax affairs are in order: that you have filed current taxation returns and there is no significant outstanding tax owing to the ATO, both personally and in terms of any businesses that you own. The ATO is able to take this into consideration in determining if you are suitable as a trustee. Generally, members under 18 years of age cannot be trustees of a super fund. In these cases a parent or guardian can be a trustee for a member who is under 18 years of age and does not have a legal personal representative.

In terms of companies, a company cannot be a trustee if:

  • a responsible officer, such as the secretary, director or executive officer, is a disqualified person
  • a receiver, official manager or provisional liquidator has been appointed to the company
  • action has begun to wind up the company

Step 5: Check the residency of your fund.

To be a complying super fund and receive tax concessions, your fund needs to be a resident super fund at all times during the income year. This means your fund needs to meet the ATO definition of an “Australian superannuation fund” for taxation purposes. If a member of the fund travels overseas or moves overseas for work and takes up non-resident status in terms of their own personal taxation situation, this may impact on the residency status of their super fund. If the fund is non-complying in terms of residency, its assets and its income can be taxed at the highest marginal tax rate.

The ATO has a residency test for SMSFs which can be accessed through the ATO website.

Step 6: Create your trust and trust deed.

The trust deed is the legal document which sets out the rule for establishing and operating your fund and contains details of its objectives, the membership structure and how benefits will be paid. This is a legal document, which needs to be prepared by someone who is qualified to do so. All trustees need to sign and date the trust deed and ensure that it is properly executed according to state or territory laws. The trust deed and super laws together form the fund’s “governing rules.”

Trusts are common legal and financial structures where a person or company – or the trustees – hold assets in trust for the beneficiaries. A super fund is a special type of trust, set up and maintained for the sole purpose of providing benefits to members

Step 7: Appoint your trustees, and make a record of each member’s tax file number.

So now you have decided on your structure and are pressing ahead. It’s time to formally appoint the trustees for your fund. All trustees and directors need to sign a declaration staying that they understand their duties and responsibilities. This needs to be done within 21 days of becoming a trustee or a director, and you need to keep this declaration for as long as is relevant, or otherwise for at least 10 years. All trustees are bound by the trust deed and are equally responsible if its rules are breached.

The declaration must be kept on hand and made available to the ATO in the event of any audit or review. The ATO has the ability to impose penalties if the declaration is not signed, or made available to the ATO upon request.

This is also a good time to also formally record the tax file numbers (TFN) of everyone in the fund. All TFNs need to be quoted when the fund is registered with the ATO. If no ATO is provided for a member, your fund is not able to accept certain contributions made on their behalf, including personal and eligible spouse contributions. The fund will also need to pay some extra tax on some contributions made to that member’s account, and the member may not be able to receive super co-contributions.

Step 8: Open a bank account for your new fund.

Now you are able to open a bank account in your fund’s name, so your new fund can accept cash contributions and rollovers of super benefits from other funds you may have. This money is then invested according to the fund’s investment strategy, which you have already articulated in your trust deed, and used to pay its expenses and liabilities. There are various types of bank accounts available and it might be useful to get some insight from a professional.

It is not necessary to keep a separate bank account for each member of the fund, but you do need to keep a separate record of their entitlement, which is known as a “member account.” The fund’s bank account needs to be kept separate from each of the trustee’s individual bank accounts and any related employers’ bank accounts.

The usual way to establish an SMSF is to make a contribution to the fund at the same time as the trust deed is executed. Assets other than cash can be transferred into the fund at this time, such as listed shares and securities or property.

Step 9: Register your fund with the ATO.

You’ve got your deeds and your bank account, so now it’s time to register your fund with the ATO, which is the regulator for the SMSF sector. This is a little more complex than simply telling the ATO that you exist. For example, you need to decide if you want the ATO to regulate your fund. For your fund to be a complying fund and receive tax concessions, it needs to be regulated and comply with the super laws. Non-regulated funds are not entitled to tax concessions, and you won’t be able to claim tax concessions or deductions for contributions you or your employer makes to your fund. You need to make this decision and act on it within 60 days of establishing your fund, which is generally considered from the moment your trust deed is signed and the first contribution is made.

The next part of this process with the ATO is for your fund to be allocated a tax file number (TFN) and an Australian business number (ABN). The ATO will allocate these numbers, and then place details of your fund on the Australian Business Register, and also the Super Fund Lookup. You need to be aware that other super funds can use Super Fund Lookup to check whether your fund is a complying fund for transferring super benefits. This will be important if you have some money in – for example – an industry fund and want to transfer those into your SMSF. Other super funds will not transfer super benefits while your fund’s details are not on Super Fund Lookup.

You will also need to register your fund for good and services tax (GST) if its annual GST turnover is over $75,000. And to register for GST, your fund needs to have an ABN. Many SMSF’s do not have to register for GST because most funds mainly make input-taxed sales, and those do not count towards GST turnover.

Step 10: Prepare an investment strategy.

If you decide to set up an SMSF, you will obviously have been thinking about the type of investments you want to make. But the ATO, as the SMSF regulator, requires you to articulate this as a written investment strategy. This provides you and the other trustees with a framework for your investment decisions as you increase members’ benefits for retirement. The strategy should be in writing so you can show that your investment decisions not only comply with your strategy, but with the super laws.

As you consider your investment strategy, you need to consider:

  • diversification (investing in a range of assets and asset classes)
  • the risk and likely return from investments, to maximise investor returns
  • the liquidity of a fund’s assets (how easily they can be converted from cash to meet fund expenses)
  • the fund’s ability to pay benefits when members retire and other costs the fund will incur
  • member needs and circumstances (for example, their age and retirement needs)

So now you’re there. You have a fund, it is compliant and you have transferred your assets across. Now, you have to run it…

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