Self Managed Super Loans provide a unique opportunity to use retirement savings to invest in property. They offer greater control over financial choices and potential tax advantages. To gain these advantages, it is important to understand the process of setting up an SMSF, specifically the legal requirements.
How to set up a Self-Managed Super Fund?
1. Determining Suitability
Before establishing an SMSF, it is a good idea to assess whether it is the right choice for your retirement savings. There are a few factors to consider – your financial knowledge, time commitment, and investment goals. At this point, it is advisable to consult with a licensed financial adviser to evaluate your options and understand the risks involved. If you decide that this is the right approach for you, it’s time to move on to actually setting up an SMSF.
2. Choosing a Trustee Structure
A trustee structure is the type of trustees that manage a Self-Managed Super Fund (SMSF). There are two main types of SMSF trustee structures: Individual Trustees and Corporate Trustees.
Please consider the following table to better understand the differences between both types and make an informed decision:
| Aspect | Individual Trustees | Corporate Trustee |
| Number of Trustees/Directors | Up to 4 individual SMSF trustees. | A company as trustee with 1 to 4 directors. |
| Membership Requirement | Each SMSF member must be a trustee, and each must be a member. | Each SMSF member must be a director, and each director must be a member. |
| Single Member SMSF | Must have two individual trustees; one must be the member. The second trustee must be a relative if an employee. | A member can be the sole director of the corporate trustee. |
| Title of SMSF Assets | In the name of all individual trustees “as trustees for” the SMSF. | In the name of the company “as trustee for” the SMSF. |
| Change in Membership | The title of SMSF assets must be updated, which can be time-consuming and costly. | Only the directors of the company need to be updated. |
| Penalties for Breaching Super Laws | Each individual trustee can be penalised separately. | Only the corporate trustee is penalised. |
| Estate Planning and Succession | Less flexibility for estate planning and succession. | Greater flexibility for estate planning and succession. |
3. Create a Trust Deed
Once you have decided on the type of Trustee Structure, the next step is to create a Trust Deed. A trust deed is a legal document that outlines the rules for operating the SMSF. It must comply with superannuation laws and clearly define the fund’s objectives, member eligibility, and benefit payment procedures. It is advisable to have a lawyer prepare this document to ensure compliance and avoid any legal complications later.
4. Register the SMSF
By this point, you are eligible to register your SMSF. For that, you need to:
- Obtain an Australian Business Number (ABN).
- Apply for a Tax File Number (TFN).
- Ensure that the fund meets the definition of an Australian super fund as per the Australian Taxation Office (ATO) requirements.
5. Develop an Investment Strategy
An investment strategy is a crucial component of your SMSF and must be reviewed regularly to ensure it remains relevant to the members’ needs. It should address the following:
- The members’ investment goals.
- Risk tolerance and diversification.
- Liquidity needs and insurance requirements.
When developing an investment strategy for your SMSF, consider the potential of investment loans to bolster your property portfolio. Additionally, SMSF property diversification should be central to your plan, as diversifying assets can help mitigate risks and enhance long-term returns.
It is also important to remember that once you develop your strategy, an expert broker can provide valuable insights into financing options and help align investment choices with the fund’s goals.
6. Open a Bank Account
Next, you will need to open a bank account in the name of the SMSF. This can be used to receive contributions and manage the fund’s cash flow. For this, banks typically require the SMSF’s ABN, TFN, and a copy of the trust deed to open the account. However, it is easier to consult your particular bank on their requirements for this step.
7. Obtain an Electronic Service Address (ESA)
An ESA functions as a digital mailbox for SMSFs and is necessary for managing contributions and rollovers electronically. This means, it allows your SMSF to receive and send information to the ATO efficiently.
At this point, you have essentially set up SMSF and can move on to the finance part of the process. But there are a few things to remember even after the initial set up since managing an SMSF requires ongoing attention.
8. Appoint an Auditor
An SMSF must be audited annually by a registered SMSF auditor. This is essential to comply with regulatory requirements and ensure the fund’s financial statements are accurate.
9. Maintain Compliance and Record Keeping
Trustees are responsible for ensuring that the SMSF complies with superannuation laws. This is an important part of the process because failure to comply can result in significant penalties, including loss of tax concessions.
This includes:
- Keeping detailed records of all transactions.
- Lodging annual tax returns.
- Reporting any transfer balance cap events.
10. Regular Review and Management
Trustees should regularly review the investment strategy, keep abreast of superannuation and tax law changes, and ensure that the fund’s operations align with its objectives. This can be time-consuming, often requiring more than eight hours a month. When reviewing your strategy, exploring various refinancing options can also be an effective way to adapt to changing financial needs and maximise your fund’s performance.
How long does it take to set up an SMSF?
The time it takes to set up a Self-Managed Super Fund (SMSF) can vary significantly based on several factors, including the complexity of the fund, the efficiency of the service provider, and the level of preparation by the individual. Generally, the entire process of setting up an SMSF typically takes between 4 to 6 weeks, depending on the adviser’s efficiency and the ATO’s responsiveness. In some cases, mainly if there are documentation or data mismatches, the process can extend to 28 days or longer for registration and ABN/TFN issuance.
What are common errors people make when setting up a Self-Managed Super Fund (SMSF)?
1. Do Nothing After Setup
Many individuals fail to take action after establishing their SMSF, allowing their funds to sit idle without a clear investment strategy. This often stems from a lack of understanding of investment options or paralysis by analysis.
To avoid this, develop a comprehensive investment strategy before setting up the SMSF. Engage in research and planning to ensure you have a clear plan for utilising your funds effectively.
2. Poor Assessment of Costs
Individuals often underestimate the costs associated with setting up and maintaining an SMSF. This includes setup fees, ongoing accounting and auditing costs, and potential legal fees, especially if a corporate trustee or a bare trust is needed. Hence, conducting a thorough cost analysis before establishing the SMSF is important.
List all potential expenses, including:
- Setup costs for the fund
- Fees for establishing a corporate trustee (if applicable)
- Loan application fees (if borrowing)
- Ongoing accounting and auditing fees
- Investment-related costs (e.g., property purchase costs, brokerage fees)
3. Underestimating Time Commitment
Managing an SMSF requires a significant time commitment for ongoing administration, compliance, and investment management. Many people must pay more attention to the time needed to effectively run an SMSF.
So, be realistic about the time you can dedicate to managing the SMSF. This can include researching and selecting investments, managing the investments actively, and preparing and filing tax returns. In case you lack the time or expertise, you can consider outsourcing some of these tasks to professionals like Ausfirst Lending Group, known for their expertise in managing SMSFs efficiently.
4. Neglecting Compliance Requirements
Setting up and managing SMSF Loans involves strict compliance with superannuation laws and regulations. Common mistakes include failing to maintain proper documentation or not adhering to the rules regarding fund operations.
Conclusion
Setting up an SMSF can be a rewarding way to manage your retirement savings, but it requires a thorough understanding of the responsibilities and risks involved.
