Self-managed superannuation funds (SMSFs) are popular among Australian investors seeking greater control and flexibility over their retirement savings.
Unlike traditional industry funds, SMSFs allow individuals to tailor their investments to meet their needs, giving them greater control over their retirement planning.
However, with this added freedom comes a significant increase in responsibility, as SMSF trustees are required to comply with a range of complex legal and financial regulations. As a result, it’s crucial for anyone considering setting up an SMSF to be well-educated about all the requirements involved.
If you’ve already sought professional advice and would like to proceed with setting up an SMSF, you’ll also need to know that it’s as simple as setting up an industry fund, and there are several critical steps you need to follow.
So, in this article, we’ll guide you through the various steps involved in setting up an SMSF, giving you the knowledge and confidence you need to make informed decisions about your retirement savings.
Step 1: Establish Your Self-Managed Super Fund Structure
The first step in setting up your SMSF is to determine the structure of your fund. There are two main options to consider:
- Single Member Fund or Multiple Member Fund:
The first decision you must make is whether your SMSF will have a single or multiple member structure.
- Individual Trustees or Corporate Trustees:
Once you have decided on the member structure, you must choose between having individual trustees or a corporate trustee structure for your SMSF.
Here are the requirements for each structure, depending on whether you choose individual or corporate trustees:
|Single member fund structure
|You must appoint at least two trustees. One of the trustees must be the fund member, and the other must not be the member’s employee unless they are also related.
|The fund can have one or two directors. The member must be one of the directors. If there are two directors, the other directors can’t be members’ employees unless they are related.
|Multiple member fund structure
|The SMSF can have between two to six fund members, and each member must be appointed as a trustee. Additionally, a member can’t be an employee of another member unless they are related.
|The fund can have two to six members, and each member must be appointed director. Moreover, a member can’t be an employee of another member unless they are related.
Mr and Mrs Lee want to set up an SMSF with just the two of them as members. They can choose between a single-member or a multiple-member fund structure and between individual trustees and a corporate trustee.
If they choose a single-member SMSF structure, then Mr Lee will be the sole member of the fund, and they will need to appoint at least one other person to act as a trustee with him. If they opt for individual trustees, they could nominate Mrs Lee as the second trustee.
On the other hand, if they choose a corporate trustee structure, they could establish a company called Lee Pty Ltd, which will act as the fund’s trustee. In this case, Mr and Mrs Lee could be appointed directors of Lee Pty Ltd, with the company responsible for managing the fund’s assets.
Ultimately, the choice between the two structures will depend on your circumstances, such as your goals for the SMSF and the level of responsibility you want to take on. There are also differences in the superannuation laws, governing rules, ongoing costs and reporting, so it’s important to seek advice from SMSF professionals to make an informed decision.
Step 2: Appoint Trustees
After deciding on your SMSF’s structure, and whether you will have individual or corporate trustees, the next step is to appoint trustees.
While you may think you can appoint any ordinary, prudent person, not everyone is eligible to become a trustee of an SMSF. They must meet specific criteria, such as being over 18, not being under a legal disability or a disqualified person, and having no outstanding tax or super affairs.
Once you have determined your eligibility, all the members must understand their roles and responsibilities under the law.
The ATO offers various courses to help with this understanding.
After fully comprehending your roles, responsibilities, and obligations, you must consent to being appointed as a trustee in writing. Every new trustee must sign the trustee declaration form within 21 days of consenting to become a trustee, indicating that they understand their duties and responsibilities.
Step 3: Create an SMSF Trust Deed
Once you have appointed your SMSF trustee, the next step is to create a trust deed for your SMSF.
The trust deed is a legal document that sets out the rules and regulations of the SMSF and is the foundation of your fund’s compliance. The trust deed should include information such as:
- the fund’s investment strategy,
- how trustees are appointed and removed,
- how benefits are paid, and
- how you can wind up the fund.
The trust deed must comply with superannuation law and be tailored to suit the specific needs and objectives of the fund. You should seek professional advice from a lawyer or an SMSF accountant to ensure the trust deed is comprehensive and legally binding.
Another thing to note is that the trust deed isn’t necessarily a static document. You should regularly review and update it as necessary to reflect any changes to the law, your fund’s circumstances or the best interests of those involved.
Once you have created the trust deed, all the trustees must sign and date it, after which it should be filed along with all the fund’s records.
Step 4: Register Your SMSF
Once you have set up your own SMSF, appointed trustees, and created a trust deed, the next step is registering your SMSF with the Australian Taxation Office (ATO). You must register your SMSF with the ATO within 60 days of its establishment.
Registering an SMSF requires an Australian Business Number (ABN) and Tax File Number (TFN). An ABN is a unique 11-digit number that the Australian Business Register (ABR) issues to identify your SMSF to the government and other entities, while a TFN is a unique number that the ATO issues to identify your SMSF for tax purposes.
You can apply for your ABN and TFN at the same time by completing an ABN application form. You can do this yourself through the ABR website or seek assistance from a registered tax agent or accountant.
Step 5: Open a Bank Account for Your SMSF
After registering your SMSF with the ATO, the next step is to open a separate bank account for your fund. The purpose of this is to keep your SMSF’s assets separate from your personal assets.
When choosing bank accounts, you must look for one that meets the specific needs of your SMSF. Some important factors to consider include the fees associated with the account, the interest rate, and the availability of online banking services.
Additionally, you need to ensure that the bank account is set up in the name of your SMSF, with the fund’s ABN and TFN attached. You must provide these details to the bank when opening the account.
Once the account is set up, ensure that you pay all contributions, member benefits and expenses related to your SMSF from this account.
Keeping accurate records of all transactions is essential to managing your SMSF effectively.
Step 6: Obtain an Electronic Service Address
Obtaining an Electronic Service Address (ESA) is an essential step in the SMSF setup process as it enables your fund to receive employer contributions using the government’s SuperStream system.
An ESA is essentially an electronic address that allows information to be exchanged securely between different service providers. To obtain an ESA, you can choose from a list of government-approved providers, including some banks and superannuation administration companies, and follow their registration process.
Once you obtain your ESA, you can provide it to your employer or their clearing house to start receiving contributions.
Step 7: Decide Your Investment Strategy
To manage your SMSF effectively, you need a clear investment strategy that aligns with your retirement goals. You should base your investment strategy on the level of risk you are willing to take, your investment goals, and the diversification of your investments.
Your investment strategy must also meet the sole purpose test. This test requires you to make investment decisions solely to provide fund members with retirement benefits. You must ensure that any investment decision for your SMSF benefits your retirement and is not made for any other purpose.
To develop an investment strategy, seek professional advice from a financial planner or investment advisor with experience in SMSFs. They can help you determine the appropriate asset allocation for your fund and assist you in selecting suitable investments that align with your investment objectives and risk tolerance.
You should also regularly review your investment strategy to ensure it remains appropriate for your retirement goals and personal circumstances.
Setting up an SMSF requires careful planning and attention to detail. We’ve outlined the basic steps involved in setting up an SMSF, but it’s important to remember that each step has various compliance obligations that must be met to ensure that your fund is validly set up.
Attempting to do it alone can be overwhelming, so it’s a good idea to seek the help of SMSF experts.
At KNS Accountants and Business Advisors, we have a team of experienced SMSF specialists who can assist you with all aspects of setting up and managing your SMSF. Whether you need help with the initial setup, ongoing compliance requirements, or investment strategy, we can provide tailored solutions to suit your needs.
Contact us today to find out how we can help you achieve your retirement goals.