Setting up your own self-managed super fund is a major decision with the potential to provide financial and lifestyle benefits for decades in retirement. With so much riding on the result, it is worth getting it right from the outset.
When you run your own fund the responsibility for complying with the law rests entirely on your shoulders, so you need to understand what you are getting into. A SMSF is a trust structure, which means you must comply with trust law as well as super regulations. Trusts allow individuals or a company to hold assets in trust for beneficiaries. In the case of super, the trust’s sole purpose must be to provide retirement benefits to members or dependents when a member dies.
Setting up a fund is not rocket science but it does involve a bit of paperwork and red tape. These are the basic steps:
- Buy a trust deed. The trust deed sets out the powers, duties and responsibilities of the trustees and the rights of the fund’s members.
- Appoint trustees. You can elect to have individuals or a corporate trustee (more on this in the next part of this series). Generally speaking, all fund members need to be trustees, or directors of the corporate trustee. Funds must have at least two individual trustees or a corporate trustee with you as a director.
- Sign a trustee declaration. This is a legal document stating that you understand your duties and responsibilities.
- Register with the ATO. You need to do this within 60 days of establishing your fund to be considered a complying fund and receive tax concessions. You can do this over the internet or by requesting a form over the phone. You will be given a tax file number (TFN) and an Australian Business Number (ABN) and you must register for GST if the fund’s annual turnover is more than $75,000. Most investment income and transactions don’t count towards GST turnover, but income from the lease of business equipment or commercial property does.
- Open a bank account. You need to open an account in your fund’s name to accept contributions and manage the fund’s operations. This account must be kept separate to members’ bank accounts and any related entity’s account. Although you don’t need a separate bank account for each member you do need to keep separate records, or member accounts, to record their contributions, investment earnings and benefit payments.
- Write an investment strategy. This document can be as vague or as detailed as you like. It should include the risks and likely return of your investments, cash flow requirements, target asset allocation and your fund’s ability to pay benefits when members retire. Although the ATO has the power to fine funds that don’t have a written strategy, this isn’t the only reason you should have one. The simple act of putting pen to paper helps clarify your thinking and provides a benchmark you can return to and adjust over time as your circumstances and the fund evolve. Your financial adviser may be able to offer guidance but the ultimate responsibility for managing investments rests with you.
- Start investing. This is the fun part, but if you feel you lack the time, the confidence or the expertise to beat the professionals you should seek professional advice. Seeking professional advice is not an admission of defeat – even if you are an experienced investor more often than not you will need help from time to time with strategy and tax implications, for example.
- Make a death benefit nomination. Although not strictly speaking a requirement of setting up a fund, the sooner you do this the better. Super benefits are not covered by your will so it is important to stipulate how your super is to be distributed when you die. You can nominate your dependents or your estate.
These steps need to be documented and recorded in the minutes of your first trustee meeting. For the typical husband and wife fund, meetings can be an informal kitchen cabinet of a few minutes or hours once a month, depending on how much fund business you have to discuss. You also need to establish some orderly housekeeping procedures for your fund’s paperwork and accounting.
If you are prepared to do some of the administrative grunt work yourself and save money in the process, there are a growing number of SMSF specialists offering varying levels of service. A fund establishment kit costs as little as a few hundred dollars, more for a corporate trustee. The same companies often also offer ongoing administration services for additional fees, but this is generally optional.
Even if you use a start-up kit and manage your own investments, you will probably need a chartered accountant to prepare the fund’s annual return. You are also required to appoint an approved auditor at the end of each financial year to check that your fund’s accounts are accurate and comply with the SIS Act.
If you use a financial adviser they will be able to guide you through the start-up process but there are also plenty of free resources online. Even if you do pay for advice, as the self-managed sector is regulated by the ATO it pays to go straight to the horse’s mouth to make sure your fund is set up correctly. Go to www.ato.gov.au/superfunds and search for ‘Setting up an SMSF’. It’s not light reading but it could save time and money down the track. Mistakes can be costly to unwind and penalties can be stiff.