SMSF Community Australian Taxation Office requirement steps to setup your SMSF!
1. Choose trustee structure
The first thing clients need to do is decide whether they want to be individual trustees or use a corporate trustee. This is an important decision, as it will impact many aspects of how the fund needs to be run.
While individual trustees are more common, there are some benefits of having a corporate trustee.
Legal advice will need to be sought when setting up a corporate trustee, as well as when establishing a security trust for the purpose of a 'limited recourse borrowing arrangement' (LRBA).
2. Establish the deed
SMSFs need to have a trust deed. This is a legal document that sets out the rules for establishing and running the fund and, along with the super laws, governs how the fund needs to be operated.
It's important the deed does not prevent the fund from doing something it may wish to do. For example entering into a LRBA or having a chain of binding nominations.
Because the trust deed is a very important legal document, it should be prepared by a suitably experienced legal professional. Clients could use a lawyer who specialises in this area or purchase a deed from an SMSF service provider that has been 'pre-prepared' by legal experts. Finally, it would be good practice for the deed provider to have a service that keeps deeds up to date.
3. Sign declarations
All new trustees must sign a trustee declaration form within 21 days of becoming a trustee or director of a corporate trustee. This form requires them to acknowledge they understand:
- The fund is to be maintained for the 'sole purpose' of providing benefits to members upon their retirement or the members' beneficiaries if they die;
- The general duties that need to be met; and
- The legal and other obligations.
4. Register with ATO
The fund needs to lodge a form with the ATO electing to be regulated, in order to be eligible for the superannuation tax concessions. This needs to be done within 60 days of signing the trust deed, but is usually done at the same time.
The fund will also need to be registered for GST if it's likely to have an annual GST turnover of more than $75,000 per annum. Once the ATO has approved the fund's registration, it will be issued with a TFN and ABN. The fund may also need to be registered for PAYG withholding tax if it is going to make lump sum or pension payments to members under age 60.
5. Open bank account
SMSFs need a bank account to accept cash contributions, receive income from investments, pay fund expenses and pay benefits to members.
To open a bank account, the SMSF will need a TFN and ABN, and will need to provide a copy of the trust deed and the registration certificate for the corporate trustee (if used). Identity checks will also need to be done for the individuals involved.
The account needs to be opened in the names of the fund's trustees and the money must be kept completely separate from the members' personal and business assets.
6. Record TFNs
The fund will need to record each member's TFN. If it doesn't, the fund:
- Will not be able to accept personal after-tax super contributions and contributions on behalf of a spouse; and
- Will need to deduct additional tax from employer contributions and contributions claimed as a tax deduction.
7. Settle the trust
While an SMSF is created when the fund's deed is executed, the ATO's view is that the process is not completed until the trust is settled. This step will usually be achieved by making a cash contribution into the fund's bank accountn.
8. Prepare investment strategy
The fund must prepare an investment strategy that takes into account all the members' needs and circumstances before any investments can be made. The investment strategy needs to:
- Set out the fund's objectives, which should be meaningful and measurable, and
- Outline the investments that will be made to achieve the objectives, which is usually done by stipulating an asset allocation.
Trustees are also required to consider whether the fund should take out insurances on behalf of the members.
9. Roll-over other super
APRA regulated funds can only roll-over amounts to an SMSF after ensuring the SMSF is registered and the person is a member of the SMSF. But even though the SMSF may have submitted its application to the ATO, and received a TFN, the necessary status will take several days or more to appear on the ATO portal.
There may also be considerable time lags between submitting a rollover request and when the money is transferred. Generally funds have 30 days to action a roll-over request, but there may be additional delays in some cases.
10. Appoint on-going service providers
Once the fund is established, the trustees need to select providers of administration, accounting and advice services. It's important these providers are competent and can work together. The auditor and the ATO will want access to good records that set out the funds actions and the reasons for them.
Meeting preliminary expenses
The preliminary costs of establishing an SMSF may have to be paid before the SMSF exists or at least has funds available to pay those expenses. In this case, the members may have to pay the expenses on behalf of the fund and this can create a range of issues.
Before paying expenses on behalf of the fund that won't be reimbursed immediately, it is important to check what contributions the members have already made to avoid triggering excess contributions tax.
Time critical investment decisions
Sometimes clients will want to purchase an investment, such as real property, in an SMSF that has only just been established and doesn't have the funds necessary to enter into the contract because of a lag in receiving roll-overs. Where this is the case, the members would need to:
- Make contributions into the fund's bank account, from which the payment to acquire the asset would be made, or
- Pay for the investment out of their own pocket, where it would still be counted as a contribution in accordance with TR 2010/1.
It's critical that when entering into the transaction to purchase the property (or any asset) by the intended trustees/members of the SMSF, that the SMSF has been established and is in existence. It is not possible to act on behalf of an entity that does not legally exist.
Equally, if an LRBA is to be entered into, then the security trust will need to exist at the time the asset is acquired and that the entity acting as the security trustee is a stand-alone corporate. The SMSF itself cannot acquire the asset.
In all cases, a person acting on behalf of an SMSF in acquiring an asset must make it clear that the acquisition is on account of the SMSF and not on their own account.
When you come to develop and document your SMSF investment strategy it is important to consider the whole circumstances of the fund and the respective needs of the members. An SMSF strategy document is like a mini-business plan for the fund and should account for the:
- relative risk and rewards of your chosen investments
- degree of diversification across different asset types and markets
- liquidity of the fund with regards to the demands on its cash resources
- ability of the fund to discharge its existing and prospective liabilities and debt.
Each SMSF has an investment strategy as unique as the needs of its members and seeking professional advice is highly recommended – at least at the set-up stage. It is also essential that you keep records of your decisions or ‘minutes’ so that an independent party can assess whether your investment adhered to your funds investment strategy.
Shares: About 40% of SMSF assets are invested in Australian shares. Many SMSF investors favour shares for their liquidity and tax-effective dividend payments. Shares will particularly suit you if you’re interested in actively monitoring the market or you have an advisor to help you develop an appropriately diversified portfolio. SMSF owners also have the option to leverage their assets using margin loans to help their investments grow faster.
Property: Since 2007, SMSFs have been able to borrow to invest in property, although lending limitations do apply. The most they can borrow (LVR) is 80% of the property value and, in the case of warrants, one year’s interest is payable in advance. Usually properties must be geared in such a way that they provide a positive cash-flow. The benefits are a maximum of 10% capital gains tax (CGT) payable on the sale of the property as long as the fund has held it for at least 12 months, and potentially no CGT bill if the property is sold after you retire and the SMSF has moved into ‘pension phase’.
Cash: Better interest rates and volatile markets recently have seen many SMSF investors opting for the safety of cash. There is no doubt that when markets crash, cash is king; but the opportunity cost of relying solely on cash and fixed interest for your retirement is a risk in itself if you miss the rebound in other markets.