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Setting up a SMSF: What to consider

Tags Retirement Planning Retirement Savings
Category SMSF Retire

An image of a man looking through binoculars

Australians are seizing control of their financial destiny with a surge in new self-managed super funds (SMSFs) being established this past financial year.

According to the Australian Taxation Office (ATO), more than 36,000 SMSFs were established in fiscal 2012, increasing the total to nearly half a million with $439 billion of assets under management.

As well as controlling your own investments, there are a number of benefits in setting up an SMSF, but there are also traps for the unwary.

Generally, it may not be worthwhile establishing an SMSF unless you have at least $200,000 in super due to the administrative costs, which can run to $2000 a year. There are also set-up costs along with the time and effort involved in selecting investments and managing the fund.

Professional advice from an accountant or licenced financial adviser is recommended, particularly as the government is prone to changing the rules.

The key principle is that the SMSF must be established “solely to pay retirement benefits to members or the members’ dependents”.

An SMSF can have either individual trustees or a corporate trustee, with different rules applicable as well as the way benefits are paid. Minors cannot be trustees and nor can ‘disqualified persons’ such as undischarged bankrupts.

Establishing an SMSF

The basic steps to setting up an SMSF involve:

  • Forming a trust deed.
  • Appointing trustees and obtaining signed trustee declarations.
  • Opening a bank account for contributions.
  • Recording each member’s tax file number (TFN).
  • Registering with the ATO to obtain a TFN and Australian Business Number (ABN).
  • Registering for GST (if annual turnover is over $75,000).

A qualified person should prepare the trust deed since it is a legal document governing all the fund’s operations including objectives, trustees, members and benefits.

Once the fund is established, it must be “registered” with the ATO within 60 days, either online via the Australian Business Register (www.abr.gov.au) or by lodging the ABN registration form with the ATO.

The next step is formulating an investment strategy concerning the fund’s financial objectives, considering such issues as asset diversification, risk and return, liquidity and member benefits. For more advice, refer to ASIC’s www.moneysmart.gov.au

As a trustee, you are required to lodge an SMSF annual return and appoint an independent auditor to audit the fund each year. Other considerations are death benefit nominations and insurance for assets or members.

When investing the fund’s money, it must comply with certain investment restrictions, such as not lending funds to members and their relatives and ensuring arm’s-length investments.

Should the ATO find the fund non-compliant, it can impose administrative penalties, strip the fund of its tax concessions and even prosecute in serious cases.

SMSF benefits

Lacklustre investment returns from major super funds, coupled with high fees, is one reason Australians are starting their own SMSFs. According to 2008 data from the Australian Prudential Regulation Authority (APRA), SMSFs have outperformed APRA funds with an annual return of 6.5 per cent compared with negative returns for the latter.

SMSFs are big investors in both residential and commercial property, benefitting from access to limited recourse borrowing arrangements. According to the Australian Financial Review, people starting their own businesses are using SMSFs to buy commercial property, given the ability to lease a property back from a fund.

Other benefits include asset protection, greater control and flexibility over a fund’s tax position and estate planning benefits for beneficiaries that are unavailable to normal super funds.

However, it’s probably best to start a new SMSF sooner rather than later, with reports that the federal government is planning to crack down on fund borrowings and reduce tax concessions.