Guide to setting up a self-managed super fund (SMSF)

SMSFs are becoming increasingly popular among Aussies who want control over their retirement nest egg, rather than leaving the management of their savings to industry or retail super funds. But how does one go about setting up an SMSF?

The process can appear complicated but rest assured, once you've got your head around the lingo and compliance requirements, managing your own super (or entrusting it to someone you trust) can be well worth it. 

Six steps to setting up an SMSF

In order for an SMSF to be eligible for tax concessions, it must be set up correctly. Following these six steps should put you in good stead to start growing your own retirement wealth.

Step 1: Assemble your team

Unless you're an experienced investor, lawyer, financial planner, or SMSF expert, you'll need some help getting the SMSF ball rolling.

When choosing professionals to help you, ask the tough questions. Check their fee structures and their accreditation, and don't be afraid to get a second opinion.

"If you're interested in setting up a SMSF, you should receive advice from an SMSF expert on whether an SMSF is suitable for you," Susan O'Connor Accounting principal and SMSF specialist Susan O'Connor told Your Mortgage.

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"By law, an accountant cannot recommend the set-up of an SMSF without being appropriately licensed.

"A licensed accountant will prepare an advice document for you - called a Statement of Advice - which will discuss the advantages, disadvantages, and risks of an SMSF and compare the existing cost of your super fund against those of an SMSF.

"A good adviser will take into account your personal circumstances, as having a low super balance will mean that an SMSF is not a cost-effective option."

The professionals in your corner will likely also help you to set up an electronic service address (ESA), without which your fund likely won't be able to run as intended.

"SMSFs need an ESA in order to receive employer contributions and rollovers from other funds," Ms O'Connor said.

"Funds without an ESA will be unable to receive money from these sources and this can hold up the initial process."

Step 2: Appoint trustees

SMSF trustee
An individual or corporate entity responsible for managing and overseeing the operations of an SMSF. A trustee must ensure the SMSF complies with all relevant laws and regulations, acts in the best interests of its members, and adheres to the SMSF's trust deed and investment strategy.

An SMSF can have multiple trustees. You may prefer to be the sole trustee or you may want to include family members or friends. Beware, however, that an SMSF with a single trustee can face complications down the track.

"Individual trustee structures may be chosen as the initial cost is cheaper, however this structure may cause issues later when members pass away or exit the fund, and these issues can be time consuming and expensive to fix," Ms O'Connor warns.

"A corporate structure is always my preferred option because a company continues indefinitely."

Duties of trustees include:

• Ensuring the SMSF complies with the 'sole purpose' test of providing retirement benefits to members

• Regularly reviewing and updating the SMSF investment strategy to ensure it takes into account members' retirement goals

• Ensuring that SMSF assets remain 'at arm's length' and aren't used for personal benefit until after retirement.

Trustees must sign a legally compliant declaration to ensure they're aware of their duties and responsibilities under the super law.

Step 3: Obtain a trust deed

Once you've selected your SMSF's trustees, it's time to have a trust deed prepared.

SMSF trust deed
A legal document setting out the rules and operational guidelines for an SMSF. The trust deed, along with superannuation laws and regulations, guides trustees in making decisions and ensures the SMSF complies with Australian law.

The deed serves as evidence of the trust's existence and establishes the rules of operation for the fund. It needs to set out:

• Who the trustees are

• How trustees may be appointed (or removed)

• The powers of trustees

• Eligibility for membership

• Conditions relating to acceptance of contributions

• Conditions for payment of benefits to members

• Procedures for winding up the fund and provisions relating to valuation of assets

You must ensure your SMSF's deed is tailored to meet your fund's individual needs and compliant with legal requirements, so having an independent legal professional guide you through this process is essential. It's also worth ensuring your SMSF's trust deed allows for death benefit nominations.

"Super doesn't form part of your estate when you pass away, so members must fill out and sign a binding death benefit nomination (BDBN) to nominate a beneficiary," Ms O'Connor said.

"There are strict rules for who is eligible as a super beneficiary and this differs from the definition of a dependent in the Income Tax Assessment Act."

Step 4: Register your SMSF with the Australian Tax Office

Once your fund is legally established and all trustees have signed a trustee declaration, you need to register your fund with the ATO to be recognised as a regulated fund. This registration is essential for the SMSF to qualify for the concessional income tax rate of 15%.

You'll also need to obtain an Australian Business Number (ABN) and Tax File Number (TFN) for the fund. If the fund's annual GST turnover - that is, income that isn't input-taxed sales - exceeds $75,000, you'll also need to register your SMSF for GST.

Once an SMSF elects to become a regulated fund, this decision is permanent unless the fund is wound up. As a result, trustees are legally obligated to:

• Lodge an SMSF annual tax return to report the fund's financial activities

• Pay the supervisory levy, which is currently set at approximately $45 per year

• Have an annual audit report prepared by an independent approved SMSF auditor to ensure compliance with superannuation regulations and reporting standards

Step 5: Open a dedicated bank account

It's absolutely essential that you open a separate bank account dedicated to your SMSF to keep your super fund assets well away from your personal assets and simplify account-keeping and administration. The trustees can use this account to receive any new contributions and rollovers from other super funds, pay all fund-related bills and loan payments, and keep track of benefits paid to members. Trustees will also need to keep a separate record of each members' entitlements, called a 'member account' recording a member's contributions, fund earnings and benefit payments.

Step 6: Invest

Now the fun begins. By now you've likely set up an SMSF investment strategy, which essentially breaks down where an SMSF's funds are going and how each investment will benefit its members' retirements. It's also essential to keep records of your decisions or 'minutes' so an independent party can assess if investments adhere to your fund's investment strategy.

An SMSF investment strategy acts like a tailored business plan for the fund and should address:

• The relative risks and potential rewards of chosen investments

• The degree of diversification across different asset classes and markets to mitigate risk

• The liquidity of the fund to ensure it can meet its cash flow requirements

• The fund's ability to manage existing and prospective liabilities, including any debt obligations

This usually needs to be updated annually, or if any significant events happen, such as a market downturn or if a member leaves or dies.

An SMSF can borrow via SMSF loans to invest in shares, property and other assets, thereby leveraging off their existing capital to multiply their growth and pay a great deal less tax when realising those gains. Though, leveraging also increases risk and should be approached with careful planning.

How much super do I need to set up an SMSF?

You can set up an SMSF with $5 or $5 million of superannuation, however the costs of managing an SMSF limit how effective this strategy will be without substantial funds to begin with. Ms O'Connor commonly sees people make the mistake of setting up an SMSF with too low a balance.

"SMSFs set up with low balances aren't as cost effective as retail or industry funds, as their fees are based on a percentage of the super balance, while SMSF accountancy fees tend to be fixed," she said.

"This means that, for lower balances, a retail or industry fund will be a more cost-effective option."

A common rule of thumb is that a person should have $200,000 or more in super before considering an SMSF, otherwise their fund might spend more in maintenance than it realises in additional earnings.

What are the advantages of setting up an SMSF?

1. Control
   You can invest the money as you fit - whether that be in shares, property, or other investment vehicles

2. Lower fees
   If you have a decent chunk of super, you might be able to operate your SMSF for less than the annual management fees charged by a conventional superannuation fund.

3. Gearing
   You can borrow funds through an SMSF loan and leverage to buy assets such as property or shares, thereby gearing with the aim to grow wealth faster.

4. Tax savings
   Contributing to your SMSF can save you tax and SMSFs pay a maximum of 15% tax.

5. Estate planning
   SMSFs can continue indefinitely and surviving family members may enjoy tax-advantaged income after your death.

What are the disadvantages of having an SMSF?

1. Responsibility
   As a trustee, you'll have to ensure your SMSF adheres to super and tax law. Penalties for failing to do so can be harsh.

2. Know-how
   You'll need to be a savvy investor to ensure your SMSF is outperforming gains it could have made with a traditional superannuation fund. You can appoint advisers or brokers to help, but that will cost money.

3. Paperwork
   You'll be required to meet all record-keeping and reporting obligations of your SMSF, including annual tax returns, audits, and records of transactions and contributions. Relying on experts to handle this aspect will cost you money, but could very well be worth it.

4. Investment risk
   Chances are, your SMSF will be less diversified than a traditional super fund. Using gearing adds another level of risk. If you lose part or all of your super through theft or fraud, the government won't provide compensation like it would have if your super was in an industry or retail fund.

5. Insurance
   While regular super funds sometimes come with insurance coverage, you'll need to independently source any life, total permanent disability, and income protection insurance if you go down the SMSF path.

_{Article originally written by Gerv Tacadena in 2022. Last updated by Brooke Cooper in 2024.} 

_{Image by Jessica Hearn on Unsplash}