A major draw of establishing an SMSF is the flexibility to blaze your own path to retirement. You, and up to five more members or trustees, have complete control over investment decisions. You can tailor your choices to your financial goals and risk tolerance, and adjust the portfolio when needed without waiting for a fund manager's approval. You are in the driver's seat, steering the fund into the path that benefits you most.
However, with this control comes significant responsibility. Ensuring your SMSF complies with Australian superannuation laws is essential to safeguarding its tax advantages and avoiding costly penalties. Managing an SMSF also requires a fair amount of investment knowledge and significant time commitment. And unless you outsource this, be ready for a lot of admin and paperwork too.
If you're ready to take the plunge, here's how to set up your self-managed super fund.
1. Assess SMSF Suitability
Evaluate whether an SMSF is suitable for your superannuation balance. The Australian Tax Office (ATO) recommends factoring in all the costs and work involved to determine whether an SMSF is right for you.
Establishing an SMSF entails set-up fees and ongoing expenses. So make sure you have enough super balance to make this pursuit cost-effective. Research suggests SMSFs become cost-competitive with industry funds with a balance of around $200,000.
Additionally, assess your willingness to take on ATO-regulated trustee responsibilities. Trustees are legally required to manage the fund, ensure compliance with all relevant super laws, and formulate an investment strategy, among other obligations.
The early admin phases of an SMSF can be time-consuming and require you to possess financial knowledge and be up to date with market trends and changes in superannuation and tax laws not only to ensure compliance but to also give your investments a better chance to yield better returns.
It's also ideal to seek advice from SMSF professionals to determine if this will be right for you.
2. Establish the Trust and Trust Deed
An SMSF is set up as a special type of trust, where a person or company (trustees) holds assets for the benefit of the beneficiaries (members). To establish a trust and ensure it operates in compliance with Australian superannuation laws, it requires a trust deed, fund assets, and trustees and beneficiaries.
A trust deed is a legal document governing the SMSF's operation. It outlines the rules of the fund, including membership eligibility and contributions, benefit payouts, and trustee responsibilities. It must be tailored to the specific needs of the SMSF and regularly reviewed and updated to reflect changes in the law or the fund's operations.
The fund's assets must be identified and set aside for the benefit of members. A clear separation of assets must be established, meaning the assets should be held in the name of the SMSF and not to any individual trustee or member.
3. Appoint Trustees
An SMSF can have up to six members, or just one member (you). Your fund can either have individual trustees or a corporate trustee.
In an individual trustee structure, all members act as trustees. If one member leaves, the structure must change.
If you are the only member of the SMSF, you must appoint a second trustee, who can be a relative, friend, or any other person not employed by you. The second trustee's role is mainly for compliance purposes as SMSF regulations require at least two individual trustees to establish the fund.
With a corporate trustee, a company is set up to act as the trustee, and each member serves as a company director. It provides more flexibility especially if the fund's membership changes.
Conversely, a single-member SMSF choosing the corporate trustee option doesn't need to have a second trustee to serve as the second director. You can be the sole director. Hence, this is the preferred option for many SMSFs with only one member.
All trustees must sign a declaration within 21 days of becoming a trustee or director to declare they have read and understood their responsibilities under the superannuation laws.
4. Register the SMSF
Once the fund is established and all trustees have been appointed, register your SMSF with the ATO to be recognised as a legitimate super fund and therefore qualify for the associated tax concessions.
To register, you need to do the following:
Apply for an ABN and TFN
The SMSF's Australian Business Number (ABN) and tax file number (TFN) are the identifiers you will use to lodge annual returns and interact with the ATO. Applications can be done online via the Tax Office's Business Registration Service. During the process, you will need to provide details about the SMSF, including trust deed and trustee information.
Elect to be regulated by the ATO
By making this election, the SMSF become a complying superannuation fund that allows it to access the 15% concessional tax rate on the SMSF's income, tax exemption for income earned in the pension phase, and the ability to roll over funds from other super accounts into the SMSF.
Registration must be accomplished within 60 days of establishing the fund.
Register for GST (optional)
SMSFs are only required to register for goods and services tax (GST) if they generate more than $75,000 in annual revenue. If your fund engages in significant property or business investments, you may reach or exceed this amount and therefore would have to register. Rent income from residential properties, along with shares and dividends, are GST-free.
Even if your SMSF does not reach the threshold, you can opt for voluntary GST registration. This is generally only beneficial for SMSFs that own commercial property, as you can claim GST credits on certain expenses.
5. Create an Investment Strategy
An investment strategy serves as the fund's blueprint for how it will manage and invest its assets. The strategy is not static - it must be regularly reviewed and adjusted to align with changing circumstances such as members' needs and market conditions.
Generally, it's no longer enough to simply outline roughly what proportion each asset class makes up the SMSF. It must be a more detailed ledger justifying the reason for each investment.
The investment strategy must outline the objectives of the fund, which can either be short-term (e.g., maintaining liquidity to pay pensions) or long-term (e.g., growing the fund's assets for future retirement benefits).
It should also define the risk profile, specifying whether the fund will focus on high-growth investments (e.g., shares) or more conservative assets (e.g., cash or bonds). If you intend to invest the fund in highly volatile assets like cryptocurrency, it must also be properly documented in the investment strategy.
See also: Cryptocurrency Investments and SMSFs
6. Open a Bank Account
Set up a bank account in the SMSF's name. This account will be used to accept contributions and income from investments. This is also the account you will use to pay for the SMSF's expenses and liabilities.
The SMSF's bank account should not be used by any other entity or individual, i.e., for receiving tax refunds by your tax agent, and must be kept separate from the trustees and any related employers' bank accounts.
You also need to get an electronic service address (ESA) for your fund. From 1 October 2021, the ATO requires SMSFs to use SuperStream to receive contributions from employers and rollovers of any super to or from the fund.
7. Comply with Contribution Caps
Ensure that member contributions and rollovers into the fund comply with the limits set by the ATO. Contributions can come from different sources and are subject to specific caps.
Concessional contributions
The current cap on concessional or before-tax contributions - which typically include employer contributions, salary sacrifice contributions, and personal contributions - is $30,000 per financial year, from 1 July 2024. The cap increases in increments of $2,500 in line with the average weekly ordinary time earnings (AWOTE).
If you exceed the limit… the excess amount may be taxed at the individual's marginal tax rate. Concessional contributions are taxed at 15% when received by the SMSF.
Alternatively, you can lodge a request to "adjust concessional contributions" to notify the ATO if the concessional contributions made in one financial year (FY) were not allocated until the next FY. This allows the contributions to be counted towards the concessional cap for next year.
Non-concessional contributions
Non-concessional contributions include any personal contributions for which a member does not claim a tax deduction. Since these come from income that has already been taxed, they are not taxed again when received by the SMSF.
The current concessional cap (FY 2024-25) is $120,000 per financial year. This is also reviewed annually to remain in line with AWOTE.
If you exceed the limit… you may have to pay extra tax or you may be eligible to access your future year caps, also known as the 'bring-forward arrangement', if you meet the eligibility requirements. In this arrangement, individuals of a certain age (currently under 75) can bring forward the equivalent of one or two years of annual cap from future years, depending on their total super balance.
8. Report All Compliance Obligations
Trustees are responsible for managing and reporting all compliance obligations. These include reporting annual financial statements, an annual audit conducted by an independent SMSF auditor, the SMSF's annual return (SAR), and actuarial certificates (if necessary).
Other ongoing compliance obligations include regularly reviewing the fund's investment strategy and paying the SMSF annual supervisory levy to the ATO
Failure to meet these obligations can lead to penalties or loss of tax concessions.
9. Organise and Keep All Records
Proper record-keeping helps ensure that your fund meets ongoing compliance obligations. Store records, including financial statements, for at least 10 years. These documents are critical for demonstrating the SMSF's compliance with the laws. They are also vital for the annual audit process.
Additionally, make sure all decisions made for the fund are accurately recorded in the minutes of trustee meetings. This document is also vital in audit and compliance checks, and provides legal evidence of the trustees' key decisions, helping to avoid disputes among members or with external authorities.
10. Prepare an Exit Strategy
Having an exit strategy right at the outset helps prepare for what will happen when the SMSF ends or winds up due to unforeseen events, such as a relationship breakdown between the trustees or a trustee's incapacitation or death.
The ATO recommends addressing potential exit scenarios, including ensuring all trustees have access to the SMSF's records and accounts, incorporating specific wind-up clauses in the trust deed, and encouraging members to make binding death nominations (and renewing them every three years) to avoid disputes and ensure the timely distribution of funds.
If trustees decide to wind up the SMSF, the formal process includes the following:
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Checking the trust deed to understand the requirements it specifies about winding up the fund
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Getting a written agreement that all trustees agree with the decision
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Selling or disposing of all the fund's assets (this may apply especially if you are rolling the fund's value back into an industry or retail super fund)
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Finalising tax and compliance obligations
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Paying any outstanding expenses and tax liabilities
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Distributing member benefits
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Appointing an SMSF auditor to complete the final audit
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Lodging all outstanding SMSF annual returns (SAR) and the fund's final return
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Notifying third parties of the wind-up (employers, SMSF professionals, and ASIC for corporate trustee structure)
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Closing the fund's bank account
Note that once the SMSF is wound up, it cannot be reactivated. And if your SMSF has been found non-compliant, winding up won't prevent compliance action.
11. Engage Professional Assistance
Running an SMSF requires extensive knowledge of investment management, tax laws, and compliance regulations. Unless you are confident that you can handle all the complex legal and reporting requirements, and love dealing with mountains of paperwork, it's best to seek the help of professionals. Having qualified accountants, auditors, SMSF administrators, and financial advisors can help avoid costly mistakes and non-compliance risks.
What Will Happen to a Non-compliant SMSF?
Failure to comply with SMSF regulations can lead to serious consequences for both trustees and the fund.
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Penalties - Trustees who fail to meet compliance obligations, such as breaching the investment strategy or neglecting record-keeping, are personally liable to pay penalties. This means the fine must be out-of-pocket and cannot be paid or reimbursed from the fund's assets. Penalties are usually applied from the ATO in 'units' with each unit equating a certain dollar value.
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Loss of concessional tax status - If the ATO deems a fund non-compliant, it may lose its concessional tax status and its assessable income for every year it remains non-complying will be taxed at the highest marginal tax rate.
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Disqualification of trustees - Trustees who contravened super laws or consistently fail to meet their responsibilities may be disqualified by the ATO. Individuals who have been disqualified from being an SMSF trustee can appeal for a review of the decision.
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Asset freeze - The ATO may freeze an SMSF's assets if it finds that the trustees or investment manager engages in activities that can put the fund at risk and adversely affect the interest of the beneficiaries.
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