It is now evident that Self-Managed super funds have become the clear choice for retirees as the preferred structure to invest their precious retirement assets. If you are contemplating setting up a Self-Managed super fund we recommend you get as much information as you can and, of course get the right advice from a licensed professional before going any further.
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.
From a recent discussion with an SMSF Accountant in Sydney, here are the key steps on how to setup a SMSF structure based around the ATO guidelines.
Appoint an SMSF professional to help you set up and run your fund
The ATO website suggests that this is the first step in the process, we tend to agree due to the sheer fact that you more than likely do not have the experience or knowledge that a SMSF tax specialist/agent and/or a SMSF financial adviser has. 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 and so you should too.
For example a tax agent is able to assist you in setting up the superfund, getting the tax file number, ABN and provide ongoing administration. A financial adviser 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 them, this is the role of a licenced adviser.
Setup your super trust,create a trust deed and give your superfund a name
Now you must ensure you are eligible to be a trustee of a superfund. There are various guidelines which will provide you with the criteria, and they can be found on the ATO website. Some of the criteria include: being over the age of 18, are you legally disqualified? are you credit worthy? (not declared bankrupt) and are you of sound mind? (not mentally incapacitated).
When you have established your eligibility you can then proceed to setup your super trust and trust deed (with the assistance of an accountant or solicitor). You will then need to name your superfund. Usually people will elect to 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 illustrates 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 within the tax and superannuation laws.
Structuring your SMSF and setting up the trustees and members
Previously, in our comprehensive SMSF guide, it is stated that you can have up to 4 members in a Self-Managed super fund.
Essentially, for individual trustees, each member is required to be a trustee of the fund. Otherwise you can appoint a corporate trustee, which means that you setup a company to act as a trustee, and the members are directors of the company trustee.
There are a various reasons why you may choose either type of trustee however we recommend that you speak to a SMSF accountant or professional to ascertain which one is most suitable for you. There is an additional expense in setting up corporate trustee however the advantage is achieving one central source of management, control and transfer versus having multiple trustees.
Management of your fund in terms of administration and the types of member benefit payments can be impacted by your choice of trustee, so be sure you check with your tax adviser first before proceeding.
Read the ATO website here for more information.
Registering your 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.
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.
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. If in doubt ask your financial adviser or use the expert enquiry form here.
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.
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 tax specialist 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.