How Do You Set Up An SMSF?

An accountant or financial planner should guide you through the process of setting up a self-managed super fund (SMSF), but here’s a general overview of what is involved.

If you’ve decided you want to get into the world of managing your own retirement benefit, knowing how to set up an SMSF is essential.

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Here’s our guide on the steps you need to take to start an SMSF.

Establish a trust

An SMSF is essentially a type of trust, so the first step is to establish the trust which will hold the fund’s assets. The ATO advises that to create a trust, you’ll first need to:

Choose your fund’s trustees and members

Depending on whether your trust is single-member or not, the number of trustees and members, along with whether a member is required to be a trustee, will vary. Here’s how it all breaks down.

Member and trustee requirements for different types of trusts

Trusts with more than one member

Single-member trusts

Structure Features Structure

Features

Individual trustees
  • Two to four members
  • Each member of the fund  must be a trustee, and each trustee must be a member of the fund
  • A member cannot be an employee of another member unless they’re relatives
Individual trustees
  • There must be two trustees
  • One trustee must be a fund member
  • If the fund member is an employee of the other trustee, the fund member and the other trustee must be relatives
Corporate trustees
  • One to four members
  • Each member of the fund must be a director of the corporate trustee, and each director of the corporate trustee must be a member of the fund
  • A member cannot be an employee of another member unless they’re relatives
Corporate trustees
  • The corporate trustee company can have one or two directors, but no more than that
  • The fund member must be the sole director or one of the two directors
  • If there are two directors and the fund member is an employee of the other director, they must be relatives

Source: Australian Taxation Office 

An alternative to managing your own fund is to consider comparing superannuation funds.

Create the trust deed

A trust deed is a legal document that sets out the rules around establishing and operating the SMSF. It contains details of things like:

  • The fund’s objectives
  • Who the trustees are
  • Who can be a trustee
  • How trustees are appointed or removed
  • Who can be a member
  • When contributions can be made
  • How and when benefits can be paid in accordance with SIS Act requirements
  • The procedures for winding up a fund

You can read our article which details how a superannuation trust deed works. The key points to know are:

  • A trust deed is a complex legal document which shouldn’t be prepared by anyone who doesn’t have legal and super expertise
  • It must be signed and dated by all trustees in order to come into effect
  • It should be revisited and updated regularly to reflect the needs and objectives of the fund’s trustees and members

Nominate assets

While the fund’s trustees and members may have a significant total sum in accrued retirement benefits ready to transfer, when you’re first establishing the trust you’ll need assets directly on hand to act as a proof of sorts. However you don’t need any significant amount – you could offer an amount as little as $10 when first getting things going. That being said, the ATO advises that the $10 would be treated as a contribution and would need to be allocated to a member.

Have the trustee(s) sign a declaration

Within 21 days of the trustee(s) being appointed, they will need to complete and sign a copy of the ATO’s trustee declaration form, which functions as a declaration that the trustee(s) understand their responsibilities and duties as trustees of the fund. Some of these duties include:

  • acting honestly in all matters concerning the fund
  • exercise skill, care and diligence in managing the fund
  • acting in the best interests of all the members of the fund
  • ensuring that members only access their super benefits if they have met a legitimate condition of release
  • refraining from entering into transactions that circumvent restrictions on the payment of benefits
  • ensuring that their money and other assets are kept separate from the money and other assets of the fund
  • taking appropriate action to protect the fund’s assets
  • refraining from entering into any contract or do anything that would prevent them from, or hinder them in, properly performing or exercising their functions or powers as a trustee or director of the corporate trustee of the fund

Lodge an election

You need to lodge a formal election to the ATO within 60 days of your SMSF being established. The election essentially gives the ATO a heads up that your trust is associated with a complying SMSF, and is therefore, according to the ATO, eligible to be taxed at the concessional rate of 15% rather than at the highest marginal tax rate.

If you don’t lodge this election, then the ATO will not treat your trust fund as being associated with a complying SMSF, and will tax it at the highest rate possible.

Part of lodging this election is applying for an ABN and TFN – if the ATO processes your election and approves it, you’ll be provided with an ABN and TFN for your fund.

Set up an SMSF cash account

Every SMSF needs a cash account for three reasons:

  • To hold the cash component of its portfolio, where it can accrue interest
  • To accept contributions and rollovers from members
  • To pay expenses incurred by the fund, including the annual supervisory levy, accounting fees, and taxation liabilities

You can compare SMSF savings accounts and find the best value option for your fund with Canstar.

The table below displays a snapshot of SMSF savings accounts on Canstar’s database for a savings balance of $10,000 held by a fund based in NSW, sorted by the total interest rate (highest to lowest).

Compare SMSF Savings Accounts

Make sure your fund can receive SuperStream data (if necessary)

If your SMSF is going to be receiving employer contributions from employers who aren’t party-related, it will need to be able to receive SuperStream data. You can read our guide to SuperStream here, but essentially it’s the package of reforms and frameworks which facilitate digital employer superannuation contributions. With SuperStream, each contribution is giving an identifying number and can be tracked by employers, the ATO, super funds, and service providers. It’s now compulsory for all APRA-regulated funds, including SMSFs.

In order to receive electronic contributions, your fund will need an Electronic Service Address (ESA). An ESA can be obtained for little to no cost from your SMSF administrator, tax agent, accountant or bank – you may also be able to obtain one from a dedicated SMSF messaging provider. Once you have acquired an ESA for your SMSF, you will need to provide it to the employers who will be making contributions to your fund.

As we said, setting up an SMSF can be a complex process, and it’s something you should probably seek expert advice on, from perhaps an accountant or financial planner. That being said, we hope this general outline of the process gives you an idea of what it entails and helps you decide whether setting up your own SMSF is something you want to follow through.

If an SMSF doesn’t sound right for you, rolling over your super to a better-value fund could be the answer to your superannuation malaise. You can compare funds and find the best one for you with Canstar.

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