Setting up an SMSF can be complicated. Not getting it right can materially affect your financial situation and retirement plans.
The first question you need to be sure about is whether an SMSF is the right fit. Seeking advice from an SMSF Specialist can help you determine this answer. Some considerations include:
Do you have an appropriate super balance?
You must ensure you have an appropriate superannuation balance before considering an SMSF. While a low balance can be a red flag, it is not always a barrier to entry. However, in many cases, establishing an SMSF with a starting balance of $200,000 or below may not be in your best interests. This is because SMSFs tend to be more cost efficient with larger balances.
What are your motiviations?
You must also understand your motivation for establishing an SMSF. The most common motivation SMSF trustees indicate is control. Control of an SMSF allows individuals to have a wide range of investment choice, flexibility and engagement with their superannuation. However, superannuation law is complex and you need to ensure your ambitions are allowed by the regulations and will be able to be achieved in an SMSF.
Costs and time commitments
SMSFs incur various costs in establishment and the day to day running of the fund. Ensure you are across the estimated establishment, accounting and audit costs that will be incurred by your SMSF. Speak with your SMSF Specialist so you are across all other incidental costs, which unlike large super funds generally occur with fixed rates rather than as a proportion of your balance.
SMSFs also require dedicated attention from trustees which will take time out of your daily life to manage. Understanding from the outset your legislated responsibilities and obligations before establishing an SMSF is important.
Understanding the establishment process
Once you have decided that an SMSF is right for you, you must engage in the establishment process. An SMSF Specialist is best person to help you to choose a trustee structure, select a trust deed, complete Australian Taxation Office (ATO) registration and fund set up.
8 key steps in the establishment process include:
Step 1- Choose a trustee structure
There are two structures, corporate and individual. Each has its own set of requirements and fees.
Step 2- Draft the Trust Deed
The Trust Deed is a legal document that covers how to establish and operate the SMSF.
Step 3 – Establish the Trust
To establish the trust, the fund must set aside a nominal asset for the benefit of members. This is typically a token amount until members are able to roll over their existing benefits from elsewhere or make contributions themselves.
Step 4 – Sign an ATO trustee declaration
An ATO trustee declaration must also be signed by trustees and directors of a corporate trustee of an SMSF to declare they understand their obligations and responsibilities.
Step 5 – Check on Australian Residency requirements
Australian superfunds have strict requirements. It is important you check the rules relating to establishment, asset location and control and member location.
Step 6 – Register with the ATO
The fund needs to be registered with the ATO within 60 days of being established and the trustee will need to elect for the fund to be regulated.
Step 7 – Set up a bank account for your fund
A bank account should then be opened in the SMSF’s name to accept cash contributions, receive income from investments, pay fund expenses and pay benefits to members.
Step 8 – Get an electronic service address (ESA)
SMSFs will need to be compliant with online data standards in order to receive and make rollovers as well as receive employer contributions. Therefore, it is crucial funds acquire an ESA. The ATO has a public register of SMSF messaging services providers who can provide the SMSF with an electronic service address.
Creating an investment strategy
Upon establishment you must also create an investment strategy which requires regular review.
Your investment strategy should be in writing and must consider:
- Diversification (investing in a range of assets and asset classes).
- The liquidity of the fund’s assets (how easily they can be converted to cash to meet fund expenses).
- The fund’s ability to pay benefits (when members retire) and other costs it incurs.
- The members’ needs and circumstances (for example, their age and retirement needs).
- Whether to hold insurance in your SMSF.
Will you invest in property?
It is also common for SMSF trustees to be motivated by investing in property when establishing an SMSF. You should be sure that any investment in property, particularly when gearing is involved, is appropriate for your circumstances. Holding properties in an SMSF can require some complex structures to ensure the law is followed and Specialist advice may be required prior to making an investment choice. Lack of diversification, low balances and inappropriate property investment can have a detrimental impact on your retirement savings.
We recommend discussing whether setting up a self managed super fund is right for you and your specific circumstances with an SMSF Specialist.