Setting up a self-managed super fund (SMSF) is a major financial decision. Therefore it’s important that you understand what it means to set up and manage an SMSF.
What is a SMSF?
Let’s start right at the beginning, what is super? Super is a way of investing money during your working life for your retirement. The money put into your account by your employer or yourself gets invested by the fund on your behalf. With a SMSF you run the fund yourself. That is, you make all the decisions regarding where and when to invest your money.
But how does a SMSF work?
For a SMSF you need four or less members. Each member must also be a trustee of the fund. This ensures that each member has an active role in making decisions about the fund. To protect all members, no member can be an employee of another member, except where the members are related. While each member of the fund is a trustee of the fund, you are given a choice as to the type of trustee to use. A company can act as a trustee for your fund. This is known as a corporate trustee. In an SMSF all directors of the company need to be members of the fund.
The trust deed
A trust deed is a legal document that sets out rules of establishing and operating a SMSF. The deed covers important areas such as, who the trustees are, their responsibilities and the fund’s objectives. The trustees are required to sign the trust deed and review it regularly to ensure it complies with the super laws.
Appointment of trustees
Can anyone be a trustee? Anyone over 18 and not under a legal disability (bankrupt, minor or under a mental impairment) can be a trustee of a super fund.
Can you have a SMSF with one member? Yes. But you must have either a corporate trustee or a second individual trustee. Where you decide to use a corporate trustee, you must be the sole director of the company. If you decide against a corporate trustee, the fund must have two individuals as a trustee. The second trustee cannot be your employer unless you are related to them.
The trustees/directors of the corporate trustee must be appointed before the trust deed can be executed. They must also sign a declaration stating they understand their duties and obligations within 21 days of their appointment.
Regulating your SMSF
Once your fund has established, the fund needs to be regulated with the ATO. This needs to be done within 60 days of signing the trust deed. Regulating your fund entitles you to tax concessions. That is, income and assets held by your fund will be taxed at 15% rather than the top marginal rate of 48.5%. When regulating your fund, you also need to register for a tax file number (TFN) and an Australian business number (ABN).
It is important to note that a member’s TFN also needs to be recorded. When a member does not quote their TFN, the fund cannot accept contributions made on their behalf and may have to pay extra tax on any contributions made.
Opening a cash account
A cash account needs to be opened in the fund’s name to accept cash contributions and rollovers.
A contribution is a payment made to your fund in the form of money or an asset other than money (called an ‘in specie’ contribution).
You can rollover (or transfer) any existing super benefits into your SMSF. To do so you must provide proof to your former super fund that your SMSF is a regulated complying super fund.
All cash contributions and rollovers are first deposited into the fund’s cash account. The money is then invested according to your investment strategy.
Preparing an investment strategy
What is an investment strategy? It is a strategy designed to guide the investments which will best achieve the fund’s objectives and desired level of performance.
The trustee is legally obliged to develop and implement an investment strategy. The purpose of this obligation is to protect the retirement benefits of the fund’s members and to ensure that the fund is not exposed to undue risk.
When preparing your investment strategy, you need to consider the following:
* investing in a range of assets (diversification)
* the risk and likely return from investments
* how easily the fund’s assets can be converted to cash to meet fund expenses (liquidity)
* the fund’s ability to pay benefits when members retire
Now that your investment strategy is ready, it’s time to start investing.
Keeping records
One of the most important responsibilities of the trustee is to maintain accurate fund records.
Under super and tax laws you are required to keep records. These records will ensure you meet your tax and audit obligations and will assist in the efficient operation of you fund.
Keeping good records will provide an accurate history of the fund as well as support decisions made by the trustees. It also helps the ATO work out whether you have complied with the super laws.
Appointing SMSF professionals
When you set up your fund, you should also consider using one or more self-managed super fund professionals to help you manage the fund. For example:
* a tax agent can complete and lodge your fund’s annual income tax and regulatory return and provide you taxation advice
* an accountant can help prepare your fund’s accounts and its annual financial position and operating statements
* a fund administrator can help you manage the day-to-day running of your fund and meet your annual reporting and administrative obligations
* a legal practitioner can review and update your fund’s trust deed
* a financial adviser can help you prepare an investment strategy and provide you with financial and investment advice.
Under super laws, you are also required to appoint an approved auditor to audit your fund’s operations each year.