A Guide on How To Setup A Self Managed Super Fund

If you are looking for more control and flexibiliy with your superannuation, then this guide on how to setup a self managed super fund (SMSF) may be for you.

With the rising demand for self managed super funds they have become the clear choice for retirees as the preferred structure to invest their precious retirement assets. If you are considering setting up a self managed super fund you should get educated about it and of course get the right advice from a licensed professional such as an financial planner or tax accountant before you proceed.

Here are our key findings from discussions with SMSF Accountants in Sydney & Melbourne, on how to setup a SMSF structure.

Step 1. Appoint an SMSF professional to help you set up and run your fund

The ATO website suggests that this is one of the first steps in the process, as it's more than likely you have limited experience or knowledge compared to that of a SMSF tax accountant. Effectively you are taking full control of your super assets just like the manager of your existing super fund except they have a team of accountants, administrators and advisers taking care of the process.

For example a tax accountant who specialises in SMSF's is able to assist you in setting up the superfund, getting the tax file number, ABN and provide ongoing administration. A SMSF financial planner can assist you with the investment strategy such as which assets to buy, how to structure to buy property in your super and even getting the finance approved with the help of a mortgage broker. A lawyer or legal adviser can review your trust deeds or set them up and make sure they are compliant with the superannuation legislation. One thing to take note of is they may not know much about superannuation investment strategies and how the tax laws affect you, this is the role of a licenced  adviser.

The good news is that many established advisory firms provide packaged services that include all of the above. Always interview your adviser to make sure they have the licencing and experience to assist you. A tax accountant will have a tax agent licence and an adviser will have an authority with a dealer group often referred to as an Australian Financial Services Licence or AFSL.  Either one can assist you in setting up a super fund.

 How much super do I need to setup a SMSF?

There are various opinions on this topic. The ATO, ASIC, institutions and advisers will most likley all have a different views depending on your situation and their own analysis. The truth is that there is no stipulated minimum amount you need to start a SMSF. The SIS act does not state any particular fund size that you need have to setup a SMSF. However this doesn't mean anyone should just go and set one up.

The Cooper Review that was released back in 2010 provided a comprehensive insight into the SMSF sector, including the compliance and regulations that it is governed by.  The review made a comment that there is no need to have a minimum mandate on the balance size of a SMSF as this could create "an artificial barrier to entry; within the choice architecture model members have the right to choose.” (The complete Cooper Review report can be accessed here.)

Costs need to be considered, however they are not the only reason for having a SMSF. Your financial adviser can help you, who will also have to take into consideration your age, income, goals and plans for retirement to assess whether a SMSF is the right way to go or not.

Step 2. Setup your super fund and create a trust deed and give your superfund a name

The next step is to ensure you are eligible to be a trustee of a superfund. There are a set number of guidelines that provide you with the criteria on the ATO website. Some of the criteria include being over the age of 18, whether you’re legally disqualified as a person such as are you credit worthy? (not declared bankrupt) and are you of a sound mind? (not mentally incapacitated).

Once you are sure about your eligibility you can then proceed to setup your SMSF and trust deed (usually via an accountant, solicitor or adviser). You will also need to name your super fund, typically people name it based on their family name, for example if your last name was Sydney, then you could call it the Sydney Family Superannuation Fund.

The trust deed sets out the rules by which your SMSF will be run in accordance with the Superannuation laws (SIS Act) and the ATO compliance regulations. It also provides information on the funds membership, the way benefits are paid and its objectives (such as the investment strategy). Once all of this is done you need to decide on the structure of the Trustees of the super fund. The trustees hold the ultimate responsibility and are required to manage the fund compliantly according to tax and superannuation laws.

Step 3. Structuring your SMSF and setting up the trustees and members

As mentioned in the comprehensive SMSF guide you can have up to 4 members in a self managed super fund.

Essentially for individual trustees each member needs to be a trustee of the fund. Alternatively you can have a corporate trustee, this means that you setup a company which acts as a trustee and the members are directors of the company trustee.  

There are a variety of reasons why you may have either type of trustee, you will need to speak to a SMSF accountant or professional to figure out which one is most suitable for you. There is an additional expense of setting up corporate trustee, however a typical advantage may be having one central source of management, control and transfer versus having multiple trustees.

The choice of trustee can impact the way you manage your fund in terms of administration and also the types of member benefit payments, so make sure you check with your tax adviser first before proceeding.

Step 4. Registering you Superfund with the ATO and applying for a tax file number

Once you have appointed the appropriate trustee this needs to be formally signed off (executed by signing the trust deed in your state) and then submitted to the ATO with the details of the members/trustees of the fund and their tax file numbers (ATO trustee declaration).

The next step is getting the super fund acknowledged by the ATO via applying for a tax file number (TFN) and an Australian Business Number (ABN) for the super fund through the ATO and Australian business register. You will need to send an application that once received by the ATO they may ask you for a number of other requirements such as: Copies of the trust deed, SMSF investment strategy outline, minutes and the signed declaration form of the members and trustees.

Generally it can take up to 28 days or more to receive your ABN and TFN, until you receive this information your fund is NOT operational nor compliant, so you can’t go out and start investing or attempting to roll money into your SMSF until you have formal approval from the ATO.

The majority if not all retail and industry super funds require appropriate evidence that your superfund is a complying super fund registered with the ATO before they will release your funds in the case of a rollover or a contribution.

Step 5. 28 days later… Setup a bank account

Hopefully by now the ATO has issued your TFN and ABN for your SMSF. You may feel ready to celebrate, but not yet. You now need to activate the super fund and get it ready for transacting. This means setting up a bank account.

You will need to approach your local bank or similar institution and setup a separate bank account for your super fund to allow it to receive rollovers, contributions, make investments and pay for ongoing taxes and expenses.

Once you have this in place it’s possible to start contributing to your SMSF and also if you have super with other institutions apply for a rollover form their fund and into yours. Advice should be sought from a financial adviser before you do this to find out if there are any tax implications, exit fees and loss of benefits such as life insurance.

Step 6. Preparing the investment strategy

Before your do any investing you need to have some kind of investment strategy in place that shows that you have formally discussed and noted the way the funds can and will be invested.

An understanding of the risks, liquidity and asset allocation should be formed and according to the ATO it should be in writing as a record of the way your super fund will invest. There is no prescribed form to complete this, however it needs to be recorded somewhere. There are many examples of investment strategies that you can get from your SMSF accountant or financial adviser to get a broader understanding of how this works.

Can my accountant prepare an investment strategy for my SMSF?

The answer depends on whether they are a licenced representative  or a holder of a Australian Financial Services Licence. If they are not then most likely they are not authorised or qualifed to provide an investment strategy for your SMSF. You will need to find a  licenced adviser to help you with this.

Step 7. Investing your super fund’s assets using the investment strategy

The final step in the equation is to start investing your super fund assets in accordance with your investment strategy. Typically you now have full control of the way you invest your retirement assets as long as they comply with the Superannuation and tax laws. (Read more about the SMSF Investment strategy here)

Of course your responsibilities don’t end there; you need to make sure you stay on top of compliance, administration, audit and member reporting each year. There is no need to panic though as these can all outsourced with the use of a qualified and experienced SMSF accountant. You will also need to review the life insurance needs of the members to be compliant.

So there you have it, the whole setup process in a nutshell. In laymen’s terms the steps are easy, however without proper advice and structure you could be taking excessive risk. Put simply if you had a bad tooth you wouldn’t self diagnose a filling, you would seek professional help from a dentist.

Setting up and managing a SMSF carries a level of risk that can easily be minimised, by getting a qualified financial planner or accountant to assist you. It may be better pay for the privilege of getting things right rather than save a few pennies and get things wrong having to face the ATO for non compliance.

WARNING: The ATO constantly finds a lot of do it yourself (DIY) investors getting it wrong according to the latest ATO figures for the year ending 30th June 2012 there were 8,125 SMSFs that contained 19,823 audit reported contraventions. That’s only 2% of the total SMSF population, but you don’t want to be in that 2%. The following is a guide only and is for general information purposes only, it is NOT advice.

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*Read the ATO website for more information.

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Disclaimer: The guides on this site are prepared for MMC and provided solely for general guidance only. They are based on the interpretation of the laws and ATO rulings, including draft rulings, applicable to self managed superannuation funds and other information available as at January 2014. The content of this article is general only and does not consider your personal circumstances. Accordingly, before doing anything you should obtain professional financial, legal and taxation advice. This guide is not a substitute for seeking your own professional advice. While all care has been taken in the preparation of the contents of this guide, no members of MMC or related entities, nor any of their employees or directors gives any warranty of accuracy or reliability nor accept any liability in any other way, including by reason of negligence for any errors or omissions contained herein, to the extent permitted by law.