A step-by-step guide to setting up an SMSF

Australians have two options when it comes to their retirement savings. They can direct their superannuation payments to an industry or retail super fund which will manage investments on their behalf, or they can choose to manage their own fund.

So-called SMSFs allow you to make your own decisions about your investments and while that may sound like a good proposition, they can be considerable work and are not without their risks.

See also: Self-Managed Super Funds - Pros and Cons

Let's look at how to start an SMSF.

How to set up an SMSF

1. Choose your members and structure

An SMSF can have up to six members. Once you've chosen how many members your fund will have and who they are, you'll need to choose whether you'll have a corporate trustee structure or an individual trustee structure.

A corporate trustee (essentially, a company that acts as a trustee) means each member will be a director of the corporate trustee. An individual trustee structure means each member will be a trustee. In either case, all members of the SMSF are responsible for the fund's decisions and for complying with SMSF laws.

See also: The eight most common mistakes SMSF Trustees make

2. Create the trust deed

A trust deed sets out how the SMSF will be run and its objectives. It includes the names of all members, all of whom must sign and date it.

The trust deed is a legal document that sets out the rules for establishing and operating the fund. It covers the fund's objective, who can be a member, and whether eventual benefits can be paid as a lump sum or an income stream. Together the trust deed and superannuation laws will form the fund's governing rules.

Accordingly, the trust deed must be:

• prepared by someone competent to do so as it is a legal document

• signed and dated by all trustees

• properly executed according to state or territory laws

• regularly reviewed, and updated as necessary

3. Apply for an ABN

An SMSF is required to be registered with the Australian Taxation Office (ATO) within 60 days of its creation. This can be done by a trustee or accountant applying for an Australian Business Number (ABN) to the ATO.

4. Set up an SMSF savings account

An SMSF savings account works like a regular savings account but allows each trustee access and is used to receive contributions and pay benefits. It is also a legal requirement of setting up an SMSF.

Many regular savings accounts are not permitted to be used by trusts or for superannuation purposes, so SMSFs are generally limited to specifically tailored products which greatly narrows the range of accounts available.

5. Arrange contribution system

You'll need to set up an electronic service address for employers to pay contributions to your SMSF. You'll also need to organise arrangements for any rollover of funds from other super funds.

6. Create investment strategy

SMSFs are legally required to have a documented investment strategy to satisfy the sole purpose test and guide trustees' decision-making. (Essentially, the sole purpose test aims to ensure each action taken by the SMSF is for the sole purpose of providing retirement benefits to beneficiaries of the SMSF.)

The investment strategy should also have personal details of the trustees and their financial situation, benefits and liquidity of intended assets, and the insurance requirements of trustees.

An SMSF investment strategy must set out why and how you've chosen your investments, and how these investments are going to meet each trustees' retirement objectives. With this also comes the responsibility of regularly reviewing this strategy - at least once per year or as circumstances change.

According to the ATO, there are five things you must cover:

1. risks involved in making, holding, and realising, and the likely return from your fund's investments regarding its objectives and cash flow requirements

2. composition of your fund's investments including the extent to which they are diverse (such as investing in a range of assets and asset classes) and the risks of inadequate diversification

3. liquidity of the fund's assets (how easily they can be converted to cash to meet fund expenses such as the cost of managing the fund and income tax expenses)

4. fund's ability to pay benefits (such as when members retire and require a lump sum payment or regular pension payments) and other costs it incurs

5. whether to hold insurance cover (such as life, permanent, or temporary incapacity insurance) for each SMF member

The ATO also states that the document should be 'tailored and specific' to your circumstances rather than merely tick legislative boxes.

7. Create exit strategy

Every investment should have an exit strategy prior to the investment being made - an SMSF is no different. This should account for the fund no longer being cost-effective, trustees becoming ill, dying, or moving overseas, relationship breakdowns, or wanting to move to another fund.

8. Appoint an auditor

SMSFs are legally required to be independently audited by an ASIC-licensed auditor. Appointing one when setting up the fund can save time and stress down the track.

How long does it take to set up an SMSF?

With SMSFs required to be registered with the ATO in 60 days, funds will typically be up and running before this period elapses. However, issuing an ABN can take anywhere between two to 58 days, so the time it takes to set up is dependent on ATO processes.

See also: A guide to SMSF fees

See also: Is an SMSF right for you?

Image by Sam Williams via Unsplash

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