EVERYTHING YOU NEED TO KNOW ABOUT SETTING UP YOUR OWN

SELF-MANAGED SUPER FUND

Self-Managed Super Fund (SMSF) sections

Some of us are happy to take a ‘hands off’ approach to our retirement savings. We’d rather leave it for someone else to take care of and simply check the balance a few times a year to make sure things are going okay. However, the rest of us want more control over our superannuation and it’s for these folks that a self-managed superannuation fund (SMSF) steps in to offer members the highest level of control you can get over your retirement savings.

If you’re keen to take a more active role in your retirement savings, read on!

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03everything you need to know about setting up your own self-managed super fund

What is a SMSF?

Why would I bother having my own super fund?

What should I know before setting up my own SMSF?

How do I go about setting a SMSF up?

What is involved with running your own SMSF?

What about shutting the SMSF down?

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A self-managed superannuation fund is a way of saving and investing so that you can draw an income from it in retirement. It differs from a ‘normal’ superannuation fund because the members are also the trustees and, as such, have complete control over the operation of the fund. This includes all decision making around investments, insurance and any other activity of the fund.

The fund is essentially a trust meaning that a trustee (the one with legal title) is holding onto property (being the retirement savings and investments) on behalf of the beneficiaries (the fund members). The funds are being held for one strict purpose – to provide income to the members upon retirement.

The members can act as trustee (i.e. controller of the fund) in their own names, however it’s generally recommended that a proprietary limited company is established to act as trustee. Having a corporate trustee has a few benefits with the biggest one being that changes to the members are much easier to handle than if using individuals as the trustees. ASIC has acknowledged the use of companies for this purpose and allows a small discount on the annual filing fee for any company that is solely used as a SMSF trustee.

what is a SMSF?01

everything you need to know about setting up your own self-managed super fund

why would I bother having my own super fund?02

Smith Family Super Pty Ltd

Controls

Smith Family SMSF

Mr & Mrs Smith are the only members of the fund and the

only ones who can benefit

Mr & Mrs Smith are the sole shareholders and directors of the company

For some people managing their own retirement savings is an incredibly rewarding experience. They have full control over what investments are made and enjoy the journey watching their retirement savings grow.

Asides from the good vibes, there are a bunch of tangible benefits to having your own SMSF and they include:

1. Ability to buy/sell shares and units based on your own research

2. Buying commercial property that can be leased back to your business

3. Growing family wealth by pooling resources

4. Investing in residential property

5. Ability to invest in more exotic asset classes such as art or collectibles

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With power, comes responsibility and the rules are setup to ensure that the responsibility that comes with acting as trustee of a SMSF is taken seriously. For this reason there are plenty of rules and legislation in place with the goal of protecting retirement savings of SMSF members and it pays to be familiar with the key rules so that you don’t get yourself into any strife when running the fund. Here are the top things to be aware of before starting the fund.

1. Setting up and running a SMSF costs money and like most things in life you get what you pay for. Initial start-up fees can vary between $500 and skys-the-limit, but expect to pay around $2,000 if you’re getting a company to act as trustee. Ongoing accounting and audit fees will vary, but expect to pay $3,000 as a starting point. For some people these costs are just part of doing business and are happy to pay them for the control they get, for others they are simply a cost to be resented. What would they be for you?

2. Ensure you have the time to manage it properly! Trustees are responsible for making investment decisions in accordance with the agreed-upon investment strategy and ensuring the fund is run in compliance with the relevant rules. Superannuation can be a tricky area if you don’t have the time, interest levels and technical advice at hand to do the job right.

3. Record keeping needs to be kept up to date and tidy. There are loads of rules when it comes to SMSF and record keeping is definitely one of them. Auditors will require documentation to back up every transaction undertaken by the fund so you’ll need to keep tidy and complete records. Financial statements, tax returns and any other document that need lodging with the ATO must be kept for 5 years. Minutes of meetings, trustee declarations etc. must be kept for 10 years.

4. Know your related party transactions! There are rules around how a SMSF can deal with related parties, most of which either rule them out altogether or require the dealing be at arm’s

length or on a commercial basis. A popular example is when a SMSF owns a commercial property and leases it to a member’s business in which case there must be a proper lease in place and rent needs to be paid at market value — just the same if an unrelated party was renting the property. Members and their associates cannot borrow money from the super fund. Super funds also cannot acquire assets from members, however there are two notable exceptions, those being business real property and listed securities. Either of these must be acquired at market value and on an arm’s length basis.

5. You need to ensure your super fund meets the “sole purpose test”. This states that SMSF funds are maintained for the sole purpose of providing retirement benefits to members, or their dependents. This means there are restrictions and rules as to what a SMSF can invest in. For example, if investing in collectibles such as artworks the SMSF members cannot have access to this — that means no hanging the piece in the living room for all to enjoy pre-retirement!

what should I know before setting up my own SMSF?03 how do I go about setting a SMSF up?04

Easy, just ask your accountant! Or if you want to know the actual steps …

The process is quite straight forward and you can do the whole thing yourself if you don’t want to outsource the job. What follows are the steps you need to take to get your SMSF up and running.

1. Review whether or not a SMSF is really the best option for you. If in doubt, get professional advice.

2. Decide who the members will be and discuss investment strategy within the fund. Also think about what happens if a member wants to leave or if someone dies. It really pays to think through all the possibilities before getting started.

3. Appoint professional advisors. You’ll need a tax accountant to handle the tax work for the fund each year and they should be able to sort out the annual audit that’s required for all SMSF. It’s also a wise move to line up a financial planner at this stage – they’ll be able to advise on the different investments available

to you as well as insurance options. A good financial planner will get all of this to align with your personal and business goals.

4. Establish the SMSF trust and corporate trustee (assuming you decide not to have individual trustees). If you decide to DIY there are various online services that can help here, just keep in mind the cheap ones are cheap because they either don’t provide bespoke advice and/or they are hoping to pick up fees from you further down the line.

5. Trustees need to sign a trustee declaration. This is a form provided by the Australian Taxation Office (ATO) and is the trustees officially declaring that they understand what is involved in being a SMSF trustee and that they accept the job.

6. Register the SMSF with the ATO by applying for a Tax File Number (TFN) and Australian Business Number (ABN). You can do this by applying for an ABN via the Australian Business Register (ask Google).

The process is quite straight forward and you can do the whole thing yourself if you don’t want to outsource the job.

everything you need to know about setting up your own self-managed super fund

7. Setup a bank account in the name of the trustee on behalf of the SMSF.

8. Get an electronic service address. These days contributions are generally sent electronically and this includes data about the contribution that the fund uses to correctly allocate the payments. This address can be purchased from a SMSF messaging provider. If in doubt, ask your accountant.

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What is involved with running your own SMSF?05

9. Document the investment strategy. Ensure that it reflects the needs of the members (e.g. balancing risk and growth, relative ages of the members, insurance needs, etc.) and it really is a good idea to speak with a financial planner at this stage if you haven’t already – there may be important issues that you’re overlooking by going the DIY route.

10. Contact your existing superannuation fund(s) and organise the funds to be rolled over (that’s the technical term) into your SMSF. That’s assuming you want to consolidate all your super in one place – there can be good strategic reasons to have more than one fund, but for the majority of us it makes sense to have it all in the one place.

11. Contact the employers of the members to alert them to the change in superannuation fund. They’ll need to know the ABN, the bank details of the fund and the electronic service address.

It really is a good idea to speak with a financial planner – there may be important issues that you’re overlooking by going the DIY route.

everything you need to know about setting up your own self-managed super fund

12. Setup your insurances. It can be beneficial to hold a variety of personal insurances for members within the fund including life, TPD and income protection insurance. If you’ve already got policies in existing funds it may be possible to have them rolled over into the SMSF. Again, it really is best to get professional advice here.

13. Make your initial investments. You’ll have the funds rolled in and employer contributions coming in but presumably you’ll have better ideas (as articulated in your investment strategy) about what to do with the funds than have it sitting in cash earning minimal interest. Now is time to make the initial investments in line with your strategy.

Once the fund is set up it’s time to run the thing! There are really two sides to running a SMSF – one is the ongoing management of the investments within the fund and the other is the fun stuff, the compliance! Let’s take a look at what’s involved with both of these.

Managing the investments

Now that you’ve got your initial investments made and contributions coming in you’ll need to take an active role, as trustee of the fund, to ensure that the investments being made by the fund are smart and are in line with the investment strategy you have documented for the SMSF.

You should be regularly reviewing the SMSF and asking yourself:

1. Does the current mix of investments mirror the decisions made in the investment strategy document?

2. Are the insurance policies up-to-date and correct?

3. Is the fund getting a good deal on bank fees and other management costs?

4. Are there any market changes that I need to know about that might affect the fund?

The investment strategy might outsource some of this work by recommending managed investments, but it still pays to be regularly reviewing all of the investments within the fund to make sure they are still delivering the outcomes the members need.

Managing the compliance

It needs to be said that whilst it can mostly be outsourced, there is a bit of administration and ‘compliance’ when it comes to SMSF. Compliance is a term accountants use to refer to the work required by the fund to keep it compliant with the various laws which are enforced by ASIC and the ATO. What follows is a list of the compliance requirements you need to be aware of when managing your SMSF.

1. Paperwork. Keep copies of all documentation in relation to the SMSF. This means documents relating to investments, expenses, setting up the fund… everything. Best bet is to establish a cloud-based file system and create a

how do I go about setting a SMSF up? (cont.)04

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What is involved with running your own SMSF? (cont.)05 what about shutting the SMSF down?06

everything you need to know about setting up your own self-managed super fund

new folder for each financial year – dump everything you get straight in there and give your advisors access.

2. Tax work. The fund will need to have a tax return prepared each year along with a set of financial statements. This can be handled by your tax accountant. In order to keep the ATO happy and your accountant’s fees down refer to point (1) above – good records make everyone’s life much easier at tax time.

3. Audit. The fund will need to be audited each year and this typically happens at the same time as the tax work and will be organised by whoever is sorting out the fund’s tax return. The audit requires, again you guessed it, good paperwork so remember point (1) above.

4. Minutes. Anytime the fund decides anything (e.g. start a pension, change strategy, add a member, etc.) you need to make sure that decision to make the change has been recorded in the form of a minute. Stick these in the file.

Managing the compliance needs of your SMSF doesn’t need to be difficult. There are great software solutions available that make the job easier, but really, as long as you’re diligent about saving copies of documents in a central place and keeping minutes for any changes within the fund, you should be fine.

If you get a few years in and your situation changes or you simply decide that you don’t want to manage your own retirement savings anymore it might be time to close the fund down. It’s important to make this decision early and not let it drag on lest you end up behind in your compliance obligations and let the members suffer as a result.

Once you’ve decided to close down the fund it’s best to have your tax accountant attend to the following as well as advise your financial planner of what’s going on before actually making any changes. As always, professional advice up front can save a lot of pain later on.

The actual process should be articulated in your SMSF trust deed. Broadly it’ll look like this:

1. Record a minute that explains the decision made by the trustees to shut the fund down.

2. Calculate the current member’s balances.

3. Roll the members balances over into alternative superannuation funds of their choice. Leave an appropriate balance to satisfy any liabilities (e.g. tax debts, accounting fees, etc.).

4. Close down the SMSF bank accounts.

5. Lodge a final tax return with the ATO.

6. Ensure all liabilities of the SMSF (including tax debts) are settled.

7. Pass a resolution (recorded in a minute) to wind up the fund.

8. Notify ASIC that the corporate trustee is to be wound up.

What next?

If you’ve read all this and are keen as mustard to get stuck in your first port of call should really be your accountant and your financial planner. They’ll be able to give you advice tailored to your specific situation and ensure that the SMSF is the best way to go for you and assuming it is, they’ll then be able to assist with getting it all set up correctly.

If you’ve got any questions about SMSF why not get in touch? We’d love to help.

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eBook written by Ben Fletcher