An expert guide to deciding whether an SMSF is right for you and the steps involved.
Self-managed superannuation funds are popular with Australians wishing to take on the responsibility and control of their retirement savings. SMSF Association policy adviser Franco Morelli explains what you need to know when considering this option.
A self-managed super fund (SMSF) is not the right choice for everyone. It is important that you understand your obligations as SMSF trustees and the pros and cons of setting up an SMSF.
Setting up an SMSF can be complicated and not getting it right can materially affect your financial situation and retirement plans. The first question you need to be sure about is whether an SMSF is the right fit. Seeking specialised financial advice can help you determine this answer.
Some considerations include:
You must ensure you have an appropriate superannuation balance before considering an SMSF. While a low balance can be a red flag, it is not always a barrier to entry. However, in many cases, establishing an SMSF with a starting balance of $200,000 or below may not be in your best interests. This is because SMSFs tend to be more cost efficient with larger balances.
You must also understand your motivation for establishing an SMSF. The most common motivation SMSF trustees indicate is control. Control of an SMSF allows individuals to have a wide range of investment choice, flexibility and engagement with their superannuation.
Costs and time
SMSFs incur a wide range of costs in establishment and the day-to-day running of the fund. Ensure you are across the estimated establishment, accounting and audit costs that will be incurred by your SMSF. Speak with your advisers, so you are across all other incidental costs, which, unlike large super funds, generally occur with fixed rates rather than as a proportion of your balance. SMSFs also require dedicated attention from trustees, who will take time out of your daily life to manage.
Once you have decided that an SMSF is right for you, you must engage in the establishment process. A specialist SMSF adviser is the best person to help you to run through the following steps.
1. Choosing a structure. About 81 per cent of SMSFs are set up with corporate trustees. A corporate trustee structure, while adding costs to the set-up can provide advantages to an SMSF in terms of succession planning and asset protection.
2. Drafting the trust deed. The trust deed is a legal document that covers how to establish and operate the SMSF. It details all the members and trustees, as well as the rules and regulations of the fund, investment and contribution information and wind-up procedures. It includes such things as the fund’s objectives, who can be a member and whether benefits can be paid as a lump sum or income stream. The trust deed and super laws together form the fund’s governing rules.
3. Establish the trust. To establish the trust, the fund must set aside a nominal asset for the benefit of members. This is typically a token amount until members are able to roll over their existing benefits from elsewhere or make contributions themselves.
4. Sign an ATO trustee declaration. An ATO trustee declaration must also be signed by trustees and directors of a corporate trustee of an SMSF to declare they understand their obligations and responsibilities.
5. Check on Australian residency. An SMSF is generally an Australian super fund if it was established in Australia; the control of the fund is ordinarily in Australia and the fund has at least 50 per cent of its contributing members in Australia.
6. Register with the ATO. The fund needs to be registered with the ATO within 60 days of being established and the trustee will need to elect for the fund to be regulated. This is done by applying for an Australian Business Number (ABN) at the Australian Business Register. When completing the ABN application a tax file number (TFN) for the fund should also be obtained.
7. Set up a bank account for your fund. A bank account should then be opened in the SMSF’s name to accept cash contributions, receive income from investments, pay fund expenses and pay benefits to members.
8. Get an electronic service address to receive employer contributions. If the fund receives employer contributions, it will need an electronic service address (ESA) to enable it to receive data. The employer will need to know the fund’s ABN and bank account details, in addition to the fund’s ESA.
There is still time to register for the upcoming SMSF + Investor Expo, presented by the SMSF Association from 21-22 June at the Melbourne Convention and Exhibition Centre.
If you are managing your own super, thinking of doing so or are simply a self-directed investor, the SMSF + Investor Expo is a must-attend event to explore a wide variety of SMSF, investment and lifestyle information all in one location.
As a special offer for YourLifeChoices, you are able to redeem a FREE ticket to this event. Click here to redeem your ticket or follow this link: https://www.o-tix.com/event/smsfinvestorexpo?pc=yourlifechoices/#/buyTickets
The SMSF + Investor Expo will present you with the opportunity to:
- hear the latest SMSF and investment information presented in 25-plus sessions
- listen to keynote speakers including Peter Switzer, one of Australia's leading business and financial commentators
- gain expert tips from industry specialists
- collect important resources at your own pace
- have a chance to win* big! Scan your entry ticket to win cash, holidays and more.
Franco Morelli is a key member of the SMSF Association’s policy and technical team and contributes to submissions to government and regulators on new policy and legislative measures. He is a recognised SMSF specialist adviser, has law and commerce degrees and a diploma of financial planning.
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Disclaimer: All content on YourLifeChoices website is of a general nature and has been prepared without taking into account your objectives, financial situation or needs. It has been prepared with due care but no guarantees are provided for the ongoing accuracy or relevance. Before making a decision based on this information, you should consider its appropriateness in regard to your own circumstances. You should seek professional advice from a financial planner, lawyer or tax agent in relation to any aspects that affect your financial and legal circumstances.
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