There are more than one million Australians who have chosen to set up a self-managed super fund (SMSF) to prepare for their retirement.
Many choose to set up an SMSF to gain better control over their retirement savings and to ensure the management of their superannuation is flexible enough to respond to economic and market changes.
The SMSF set-up process is being changed and refined all the time, and it’s important to stay on top of the various regulations surrounding SMSFs if you have one or are planning to set one up.
Setting up an SMSF is not a ‘set and forget’ task and requires continuous and ongoing management.
It is important to seek the advice of a specialist for assistance with the legal, taxation, compliance, auditing and administration of an SMSF, as well as the investment advice required to inform your investment decisions.
How does an SMSF work?
Self-managed super funds (SMSFs) are a way of saving for your retirement and are separate to industry or retail superannuation funds.
The members of an SMSF are its trustees or, if the SMSF has a company trustee, are the directors of the company.
This means the members of the SMSF run it for their own benefit.
Contrary to popular belief, you do not have to own a business or run a company to have an SMSF.
The legislation makes the option of setting up an SMSF available to almost anyone, if you have the right advice.
If your SMSF is not set up correctly it will not be an eligible fund, and this could cause many issues with taxation and your future retirement goals.
Managing your own superannuation through an SMSF is a major financial decision and one you only enter if you acknowledge that you will be responsible for:
- developing the SMSF investment strategy
- administration and record-keeping for the SMSF
- lodging reports, statements and other compliance requirements.
You can seek professional advice and assistance with the above and it is a good idea to get this assistance sorted prior to the initial set-up and before the paperwork associated with an SMSF begins to mount.
How long does it take to set up an SMSF?
It takes about a month to get your SMSF set up, but as explained above, the maintenance for an SMSF is ongoing.
Below are the first five steps of the SMSF set-up process.
- Step 1: Choose your members
- An SMSF must have six or fewer members and most have at least two.
- Each member of the SMSF must be a trustee and a member cannot be an employee of another member unless they are relatives.
- The members who set up an SMSF oversee it, but they are also responsible for complying with superannuation and tax laws.
- Step 2: Choose your trustee structure
- You will need to choose between an individual and corporate trustee structure.
- With an individual trustee structure, each member of the SMSF will act as the trustee.
- With a corporate trustee structure, a company will act as the trustee and the SMSF members will be the directors.
It is important to seek professional advice before determining whether an individual or a corporate structure is right for your personal situation.
- Step 3: Create the trust deed
- You need a legal deed to set up an SMSF, which will require an Australian Business Number (ABN) and a Tax File Number (TFN) for the SMSF.
- The trust deed will outline how the SMSF will operate and ensure it complies with Australian superannuation legislation.
- Step 4: Register your fund with the ATO
Your SMSF needs to be set up properly so that it’s eligible for tax concessions and can process contributions.
To be an eligible fund, your SMSF must:
- be established in Australia
- be controlled and managed in Australia
- have Australian resident members
- hold money or assets.
Complying with the rules and regulations of SMSF set-up can be confusing and it is recommended that you speak with a professional with knowledge of SMSF tax and regulatory laws.
- Step 5: Set up an SMSF bank account
An SMSF requires a unique bank account that keeps the assets of the fund separate from personal or business finances.
How much does it cost to set up an SMSF?
The answer to this one is quite variable, and it depends on the type of SMSF structure you choose and your investment strategy.
It is a legal requirement to have an investment strategy for your SMSF, and this must be documented.
An SMSF specialist is your best port of call to guide investment strategy decision-making and assist you to set your SMSF up in the most economical way possible.
Things to consider when developing your SMSF strategy include:
- the age of each member and their financial situation and risk profile
- how to diversify the fund’s investments to reduce risk
- how easily the assets of the SMSF can be converted to cash to pay future member benefits
- the current insurance needs of members and the future insurance needs of members.
Once the investment strategy has been created, the SMSF can begin to make investments, but it’s important to discuss an SMSF exit strategy with your financial adviser, also.
Getting help with your SMSF process
It is crucial to set your SMSF up correctly if you want to take advantage of the tax concessions available to SMSFs under superannuation law.
In a nutshell, it is best to spend time and money setting your SMSF up property initially, to avoid mounting larger costs during its management.
Seek independent financial advice before deciding whether setting up an SMSF is appropriate for your circumstances.
At First Financial, we work with clients to determine the most appropriate retirement planning strategy for their personal circumstances.
If you have questions about your superannuation and the options available, contact us today.
