The technical steps on how to set up a self-managed super fund are relatively straightforward, but there are several decisions to be made along the way.
Unlike a retail super fund with a board of trustees to make decisions, the fund members of an SMSF make the decisions. Perhaps this is why the Australian Taxation Office has proposed that people wanting to set up an SMSF should
- Seek professional advice
- Have an exit strategy
After that, the steps are clear:
- Establish a trust
- Create a trust deed
- Sign a declaration
- Register with the ATO
- Open an SMSF bank account.
Let’s start with the ATO recommendations
Step #1: Seek professional advice
Although you can take a DIY approach to setting up your own SMSF, you will probably need independent advice unless you are a financial and investment expert.
You must know how best to structure your SMSF and your investment strategy. You also need to know how to administer the fund and comply with quite a formidable array of taxation and superannuation laws and regulations.
There are two types of professionals you might consult:
- SMSF Accountants and financial advisers will give you professional advice on investment strategy. They might recommend a specific financial product (e.g., particular Australian securities) or influence your investment decisions (e.g., selling shares). They need an Australian Financial Services licence – AFS licence – to provide this service.
- SMSF administration experts will assist with financial statements, audits, tax lodgements and compliance requirements. These accountants do not need an AFS licence, but they do require significant experience in SMSFs, tax, and superannuation law. They can show you how to set up an SMSF, give you factual information and tax advice, administer your fund, and be your Tax Agent.
Step #2: Prepare an Exit Strategy
An exit strategy for an SMSF is a bit like a pre-nuptial agreement. Despite your hopes for a life together, you recognise the possibility of relationship breakdowns, death or incapacity, or changes in personal or financial circumstances.
Remember to add a clause to cover this when creating a trust deed (step #4).
Step #3: Establish A Trust
The SMSF establishment date is when you first deposit an asset into the fund. This can be a nominal amount, but it must be allocated to a member.
One of the first tasks is to decide the structure of your fund. There is a choice between
- Individual trustee structure, or
- Corporate trustee (setting up a company as the trustee, with members as directors)
Your choice will define the fund rules, how the fund must be administered, who owns the assets, who has liability, and the costs.
This is probably when you go back to Step #1: Speak to your financial planner about the best options for the financial situation of all members.
Another critical decision is choosing the trustees. They are the people you want to entrust with your retirement benefits. They must also be acceptable to the ATO, so check that they are eligible to be trustees and that prospective directors for a corporate trustee structure have a Director ID Number (DIN).
You can appoint up to a maximum of six trustees. If you are the sole member of your SMSF, you must appoint one other trustee. If members are younger than 18, a parent, guardian, or legal personal representative can act on their behalf.
Step #4: Create A Trust Deed
What is written in the SMSF trust deed prescribes what trustees may and must do – provided there is nothing contrary to superannuation law. It is an important legal document and is best drawn up with professional help.
The trust deed defines who the trustees are and the types of contributions and investments allowed. It also sets out how member benefits and investment earnings will be calculated and credited.
Importantly, what is not in the deed cannot be done later. For example, the wording must provide for possible later amendments and for members to nominate beneficiaries (through binding death benefit nominations).
Make sure that all trustees sign and date the document and have their signatures witnessed. Incorrectly signed documents are invalid and can lead to audit queries, ATO sanctions, including losing tax concessions, and even disputes about beneficiaries.
Trustees and directors must keep the original hard copy and any updates for the lifetime of the SMSF and five years after the final tax return.
Step #5: Sign the Declaration
All trustees and directors are equally responsible for what happens in the SMSF, even where they were not actively involved in decisions.
They must sign a declaration that they understand their obligations and responsibilities to
- Make decisions that are in the best financial interests of all members
- Comply with the SIS Act, taxation legislation, and other applicable laws
They must sign declarations within 21 days of accepting the appointment and keep them for the life of the SMSF and ten years after it winds up.
Step #6: Register with the ATO
The ATO requirements for this step are mainly administrative, where you supply the details of the fund, the members, and your Tax Agent if you have one.
You check that your fund qualifies as an Australian super fund, your choice of name hasn’t already been taken (Super Fund Lookup) and then apply for
- An Australian Business Number (ABN),
- A Tax File Number (TFN),
- An electronic service address (ESA) so that you can receive contributions from employers or rollovers from other funds
- GST registration if your fund expects to have a gross income of more than $75,000 per year from the lease of equipment or commercial property
Make sure you elect to have your fund ATO-regulated to qualify for tax concessions.
An SMSF must register with the ATO within 60 days of establishing the fund and signing the declarations.
- Trustees can register online, while SMSF administrators or tax agents use Tax Professional’s Services.
- You can track registration status on ABN Lookup and Super Fund Lookup.
Step #7: Open an SMSF Bank Account
The critical part of this step is to have a bank account in the name of the SMSF and never to get funds mixed up with personal accounts.
The ATO spells out the administrative steps on how to set up a self-managed super fund.
However, SMSF trustees or directors must make important decisions about establishing an individual trustee or a corporate trustee structure, the details of what will be included in the trust deed, and who the members will be.
Trustees can also decide whether they will take a DIY approach or appoint an experienced SMSF administrator to assist with SMSF establishment.