However there is a specific process to setting up an SMSF, with strict ATO regulations. It’s important to understand these steps before making the decision to go it alone.
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How to set up an SMSF
1. Choose your members and structure
An SMSF can have no more than six members. Once you’ve chosen how many members there’ll be 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 structure means each member is a director of the fund. An individual trustee structure is simply bound by the rules that comes with being a trustee.
2. Create the trust deed
The trust deed sets out how the SMSF will be run and its objectives. It includes the names of members, all of whom must sign and date it.
The ABS considers a trust deed:
A legal document that sets out the rules for establishing and operating your fund. It includes such things as the fund’s objectives, who can be a member and whether benefits can be paid as a lump sum or income stream. The trust deed and super laws together form the fund’s governing rules.
The trust deed must be:
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prepared by someone competent to do so as it's a legal document
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signed and dated by all trustees
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properly executed according to state or territory laws
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regularly reviewed, and updated as necessary
3. Apply for an ABN
An SMSF is required to be registered with the 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 does but allows each trustee access, and is used to receive contributions and pay benefits. It’s also a legal requirement.
Many regular savings accounts are not permitted to be used by trusts or for superannuation purposes, so SMSFs are generally limited to accounts specifically catered for them, 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. You’ll also need to organise arrangements for the 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. It should 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 should set out why and how you’ve chosen your investments, and how these investments are going to meet your retirement goals. 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:
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Risks involved in making, holding and realising, and the likely return from your fund’s investments regarding its objectives and cash flow requirements
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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
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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)
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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
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Whether to hold insurance cover (such as life, permanent or temporary incapacity insurance) for each member of your SMSF.
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, rather than down the line.
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 in before this period elapses. However, issuing an ABN can take anywhere from 2-58 days, so the time it takes to set up is very dependent on the ATO.
A Self Managed Super Fund (SMSF) is different to traditional super because the members of an SMSF run it for their own benefit and are responsible for complying with the super and tax laws themselves.
Image by Sam Williams via Unsplash
Denise Raward
Harry O'Sullivan
Rachel Horan
