What You Need to Know Before Setting Up an SMSF

Summarise with: ChatGPT Perplexity Microsoft Copilot

---

Table of Contents

• What is an SMSF?
• 1. You May Need Multiple Advisers to Establish and Manage Your SMSF
• 2. An SMSF Can Have Individual or Corporate Trustees
• 3. The SMSF Trust and Trust Deed are Important
• 4. You Must Register Your SMSF With the ATO
• 5. Your SMSF Will Need an ABN, Bank Account and Electronic Service Address
• 6. Your SMSF Needs an Exit Strategy
• Key Takeaways

Putting your money into a self-managed superannuation fund (SMSF) is one way to have more control over how your savings are invested for your retirement. However, as the name suggests, having an SMSF requires you to manage your own investments and be responsible for the compliance of the fund, making it significantly more complex than a workplace superannuation fund. This article will explain how SMSFs work and a few important considerations before setting up an SMSF. 

What is an SMSF?

There are two main types of superannuation funds in Australia: traditional workplace superannuation funds (split into industry and retail funds) and self-managed superannuation funds (SMSFs). These funds are part of Australia’s superannuation regime, which involves compulsory contributions (currently a minimum of 12% of an employee’s income) being paid into the employee’s choice of super fund. 

How Do SMSFs Work?

SMSFs are set up by the member, who also acts as the trustee. The trustee runs the fund with the sole purpose being their own financial benefit. They manage every aspect of the fund’s operations, from its investment strategy to administration, tax and legal requirements. 

The table below summarises the differences between SMSFs and traditional workplace funds.

Now that you have a basic understanding of how SMSFs work, here are a few important things you should know before you set up an SMSF.

1. You May Need Multiple Advisers to Establish and Manage Your SMSF

There are several different types of professional advisers who may be of use in the establishment and ongoing management of your SMSF. 

During Establishment

You may engage a:

• financial adviser for the preparation of your investment strategy, plus advice on different investment options;
• accountant to set up financial systems and prepare the SMSF’s annual accounts and operating statements;
• fund administrator for the establishment and ongoing management of your SMSF, including admin and reporting obligations; and
• legal practitioner to prepare or update your fund’s trust deed.

Post-Establishment

You may engage:

• an approved SMSF auditor to audit the fund; and
• a tax agent to provide taxation advice and help complete and lodge the fund’s annual return.

2. An SMSF Can Have Individual or Corporate Trustees

When establishing an SMSF, you can elect to have an individual or corporate trustee structure. The specific member and trustee requirements will differ depending on whether the fund is a single-member fund or a fund with multiple members. However, there will also be differences around:

• costs;
• ownership of fund assets;
• separation of assets;
• penalties; and
• succession.

How the Trustee Structures Work

When an SMSF is being established, trustees (individual trust) or directors (corporate trust) will need to be appointed under the fund’s trust deed. These trustees/directors are equally responsible for the SMSF’s ongoing operations, management and decisions. While other professionals may be involved in some aspects of the SMSF’s management, the ultimate responsibility lies solely with the trustees/directors. 

3. The SMSF Trust and Trust Deed are Important

During an SMSF’s establishment, a trust is set up to hold assets for the sole purpose of providing benefits to its members upon retirement. 

The creation of a trust requires: 

• trustees or directors;
• governing rules (known as a trust deed);
• at least one asset; and
• legally identifiable members.

A trust deed is a legal document defining the rules for establishing and operating the fund. It typically includes: 

• the objectives of the fund;
• a list of all members and trustees;
• how trustees/directors will be appointed or removed;
• when contributions can be made;
• whether benefits are to be paid as lump sums or income streams;
• when and how professional advisers can be appointed; and
• the ‘winding up’ procedure.

4. You Must Register Your SMSF With the ATO

In order to fully comply with ATO regulations and be eligible for tax concessions, an SMSF must be registered as an Australian super fund at all times throughout the financial year. If an SMSF does not meet all the residency conditions (ceasing to qualify as an Australian super fund), it will become non-compliant. Likewise, its income will be taxed at the highest marginal tax rate. 

To prevent this, the SMSF must comply with the following conditions: 

• be established in Australia or hold at least one asset located in Australia;
• the central management and control of the fund is typically in Australia; and
• the fund either has no active members or has active members that are Australian residents holding 50% of either:
  • the total market value of the fund’s assets attributable to super interests; or
  • the sum of the amounts payable to active members if they decided to leave the fund. 

5. Your SMSF Will Need an ABN, Bank Account and Electronic Service Address

Trustees must establish the following in the name of the SMSF to administer the fund.

ABN

Once you establish your fund and appoint all trustees/directors, you will have up to 60 days to register your SMSF with the ATO by applying for an Australian Business Number (ABN). 

Bank Account   

You must establish a bank account in the SMSF’s name to accept contributions and rollovers of super, as well as investment income. This account will also be used to pay any of the fund’s expenses or liabilities. It is important that this account is kept separate from the trustees’ individual bank accounts and any related employers’ bank accounts. 

For funds with two to four members, a single account can still be used. However, you will need a separate record of their entitlement, called a ‘member account’. Each member account will show any contributions made on or behalf of the member, fund investment earnings allocated to them and payments of any super benefits.

Electronic Service Address

If your SMSF receives contributions from employers, it will need to be able to receive contributions and SuperStream data electronically. SuperStream is the method employers must use to pay employee super guarantee contributions to super funds, including SMSFs. To receive SuperStream data, you must create an electronic service address. 

6. Your SMSF Needs an Exit Strategy

When establishing an SMSF, trustee/s must consider what will happen to the fund if it winds up. This can occur for various reasons, such as a relationship breakdown, an illness leaving a trustee incapacitated, or the death of a trustee. 

In the event of such circumstances, having an exit strategy can help reduce the impact of these unexpected events. When deciding on an exit strategy, here are some important things to consider:

• ensuring all trustees can access SMSF records and electronic transaction accounts;
• including specific rules in the fund’s trust deed that are triggered by events such as those mentioned above, which may lead to the fund becoming unmanageable;
• having all members make binding death benefit nominations;
• appointing an enduring power of attorney for each member; and
• the likely costs involved in winding up the fund. 

Complete Guide to Expanding Your Startup to Australia

After proving your startup’s success in your home country, you may be thinking about the next step for growth — expanding overseas.

This free guide aims to introduce startup founders to the Australian startup market.

Download Now

Key Takeaways

Compared to a workplace superfund, putting your money into an SMSF gives you much more control over how that money is invested. However, with that control comes responsibility. It is important to educate yourself on all the various requirements before you set up your SMSF. 

If you’re planning to establish an SMSF, you may also want to consider using a portfolio tracking tool such as Sharesight to automatically track your performance and investment income, evaluate your investing strategy and help meet your reporting requirements. Sign up for a free account to start tracking your SMSF investments today.