Setting up your Self-Managed Superannuation Fund (SMSF) the Right Way

Posted on 2/11/2020

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Overview:

If you’re thinking of establishing a Self-Managed Super Fund (SMSF), there’s a laundry list of things you’ll need to consider. In this article, we answer some of the most important questions about SMSFs and breakdown the process for taking control of your retirement savings.

Superannuation is one of the key financial considerations you will face over the course of your life. Ideally, a well-managed superannuation strategy will set you up to live comfortably in your retirement years while also providing financial security for your family.

At some point you may consider whether setting up an SMSF is the best way to achieve this. While it can be a daunting task, with the right guidance and a clear understanding of your objectives, an SMSF can provide you with greater control of your retirement savings and significantly enhance your ability to generate wealth.

 

Is an SMSF right for you?

Naturally, before you get started, the first thing you’ll need to consider is whether an SMSF is suitable for your circumstances. While seeking professional advice is always a good idea, there are some simple steps you can follow to assess whether setting up an SMSF is a worthwhile endeavour.

 

What to avoid

 Simply put, an SMSF isn’t for everyone. It requires effort and a clear understanding of your obligations as the trustee of a fund. Fortunately, there’s some helpful guidance available, with Australia’s financial regulator ASIC releasing a list of ‘red flag’ indicators that may indicate an SMSF isn’t the right fit for you.

These include:

  • Having a low superannuation balance, and a limited ability to make future contributions.
  • Wanting a simple super solution.
  • Seeking to delegate all of the running of the SMSF to a paid advice provider.
  • Seeking to delegate all of the investment decision making to someone else.
  • A lack of time to devote to managing your financial affairs.
  • Having little experience in making investment decisions.
  • Are an undischarged bankrupt or have been convicted of an offence involving dishonesty (as such, persons are prohibited from acting as a trustee).
  • Having a low level of financial literacy.

 

Getting the balance right

The first point raised by ASIC as ‘red flag’ is perhaps one of the most important considerations to make when setting up an SMSF. That is, ensuring that you a sufficient starting balance to ensure it is appropriate to set up an SMSF.

Why is this the case? The cost efficiency of an SMSF generally scales as the size of the fund grows due to the fees associated with establishing and maintaining the fund. These can range from ASIC fees related to establishing a corporate entity, annual SMSF supervisory levies collected by the ATO and other accounting and auditing costs associated with the management of an SMSF.

In fact, according to a report prepared for ASIC by consulting firm Rice Warner, 32% of respondents found the costs of setting up their SMSF was more than expected.

Currently, ASIC advises that SMSFs should have a minimum starting balance of $200,000, while a Productivity Report on superannuation found that, on average, SMSFs with balances below $500,000 have lower returns after expenses and tax compared to APRA-regulated funds (e.g. an industry or retail super fund).

However, with the right advice, it can be worthwhile entering into an SMSF with a starting balance below $200,000 provided you have in place a clearly defined and viable strategy that ensures you deride significant benefit over remaining with an APRA-regulated fund.

It is also worth considering the time it will take to establish and manage your fund. SMSFs require attention from trustees which will take time out of your daily life to manage and you need to be aware of these obligations before entering into a formal arrangement.

 

What is your motivation?

It’s important to understand why you want to establish an SMSF and what you hope to gain from it. For many trustees, control is a key consideration as an SMSF provides significantly more choice and flexibility in how you choose to invest your retirement savings.

Another motivating factor for many SMSF trustees is the desire and ability to invest in property. While this can be a great opportunity to diversify your superannuation investment portfolio, it can become quite complex to structure, particular when gearing is involved.

With or without property, it is important to understand that superannuation law is complex. It is worthwhile seeking specialised advice to ensure you are aware of all the relevant legislation and you develop a portfolio structure that will be beneficial for your retirement objectives.

 

Setting up your SMSF

If you do decide to establish and SMSF, it is worthwhile speaking with a specialist SMSF adviser who can help guide you through the process. There are several steps involved, some key decisions to be made and a significant amount of documentation is required. However, more importantly will be ensuring you clearly establish your objectives and develop a strategy that will help get you there. It’s also important to note that SMSFs aren’t set-and-forget and you will need to regularly review your strategy to ensure it remains aligned to your objectives, which may also change depending on your personal circumstances.

 

Simple SMSF establishment checklist

A good place to start is with this basic SMSF checklist from the Australian SMSF Association, which will help guide you through the process and ensure you’ve met all necessary obligations for establishing your own fund.

  • Ensure that you have determined an SMSF is right for your circumstances.
  • Seek professional advice regarding the process to establish and SMSF, including how to rollover from an existing fund.
  • Choose and appropriate trustee structure for your fund (see note 1).
  • Appoint trustees or directors as required.
  • Establish the trust with a nominal asset and associated trust deed.
  • Have the fund’s trustees complete and sign the ATO trustee declaration.
  • Check that the fund has been established as an Australian super fund.
  • Lodge an election to be a regulated fund with the ATO and consider whether the fund needs to also be registered for:
    • ABN
    • TFN
    • GST
    • PAYG withholding
  • Set up a bank account in the name of the SMSF.
  • Get an Electronic Service Address (ESA).
  • Prepare an investment strategy (see note 2).
  • Consider insurance and whether it is appropriate to take out policies within the fund for its members.
  • Ensure any property and gearing is appropriate.
  • Prepare an exit strategy and what will occur in the case of unexpected events (e.g. death or incapacity of a member) ensuring that all members agree.

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