Setting Up An SMSF
For your SMSF to be eligible for tax concessions, receive contributions and be easily administered it should be set up correctly.
I. Consider getting help from professionals
Getting help from SMSF professionals will help you set up and run the fund smoothly. Getting them involved from the very start – when you’re setting up an SMSF, will also be good because they can help you on problems you might encounter later on. However, even with the help of SMSF professionals, as a member or trustee, you are still responsible for making sure that the fund is set up correctly.
These are some of the people who can help you in setting up an SMSF.
- An accountant can help you set up the fund’s financial systems. When the fund starts to operate, they can also prepare the fund’s account and operating statements.
- Fund Administrator. The fund administrator can help you with administrative tasks during the start-up and help you manage running the fund on a day-to-day basis. He or she will also help you meet your reporting and administrative obligations.
- Legal Practitioner. This person can help you prepare your fund’s trust deed.
- Financial Adviser. This person can help you prepare your investment strategies and give you advice about the different types of investments and insurance products that you could invest in and if these will help your fund for the better.
- SMSF auditor. This person will audit your fund on a regular basis in compliance to laws.
- Tax agent. This person can help you complete and lodge the SMSF annual return and give members or trustees tax advice or represent you in dealing with ATO.
II. Choose Individual or corporate trustees
When setting up an SMSF, you can choose between having up to four individual trustees or a corporate trustee (where a company acts as the trustee for the fund).
The decision on which structure to choose should be discussed with SMSF professionals because the structures differ in terms of member and trustee requirements, cost, ownership of fund assets, separation of assets, penalties and succession.
Differences between SMSF trustee Structures
- Member and trustee requirements for individual and corporate trustees
- Individual trustee. Can have two to four members, where each member must be a trustee and each trustee a member. Unless they are relatives, a member cannot be an employee of another member.
- Corporate Trustee. Should have one or four members. Each member must be a director of the corporate trustee and each must be a member of the SMSF. Unless they are relatives, a member cannot be an employee of another member.
- Single member funds
- Individual trustee. There must be two trustees and one trustee must be a member. If a member is an employee of the other trustee, they must be relatives.
- Corporate trustees can have only one or two directors. A fund member may be the sole or only director or one of the two directors. If a member is an employee of the other director, they must be relatives.
- Costs associated with an individual or corporate trustees.
- No fees collected by ASIC. Trustees cannot be paid for their duties and services as trustees.
- ASIC charges SMSF for registration. Annual review fees are also collected. Corporate trustees are cannot be paid for their duties and services as directors.
- Ownership of fund assets
- When removing or adding a trustee, a change in the titles of the assets must be made. This is costly and consumes time. Government authorities may charge fees for title changes. Financial institutions also charge fees for title changes.
- When a member starts or stops being a member, they become or stop being a director. Notify ASIC for changes. Corporate trustees do not change, making the titles of the SMSF assets also unchanged.
- Separation of Assets
- Assets must be in the SMSF’s name. They must not be combined with personal assets.
- Assets must be in the SMSF’s name and cannot be combined with the director’s personal assets. Corporate trustees have greater protection if a trustee is sued for damages.
- Breach of super laws will penalise each of the trustees.
- Breach of super laws will penalise the corporate trustee alone.
- The fund will continue to operate unless a succession plan has been prepared.
- Even when a member dies, the corporate trustee continues. Control of an SMSF and its assets is more certain in a corporate trustee structure.
III. Appoint your trustee or directors
All members of the SMSF should be individual trustees or directors of the corporate trustee. New funds appoint trustees or directors based on the fund’s trust deeds. For people to become trustees or directors of the SMSF they must be eligible to be trustees or directors, and they should understand what it means to be a trustee or director.
Trustees and directors must consent to the appointment in writing and sign the trustee declaration stating that they understand their duties and responsibilities which should be done within 21 days of becoming a trustee or director.
These documents must be kept even after 10 years, the SMSF winds up. If these things are not done, penalties might be imposed. Trustees and directors are bound by the trust deed and are responsible for rules being followed.
IV. Create the Trust and Trust Deed
An SMSF is a special type of trust, set up and maintained for the purpose of giving retirement benefits to its members or beneficiaries.
To create a trust, you need trustees or directors of a corporate trustee, trust deed or governing rules, assets, and beneficiaries.
The trust deed is a legal document that sets the rules for establishing and operating the fund. It includes information like the fund’s objectives, who can become members and if benefits are going to be paid as lump sum or through an income stream. The governing rules of the SMSF are based on the trust deed and the super laws.
The deed must be prepared by a competent person because it is a legal document, signed and dated by all trustees, well executed and according to state or territory laws. And is regularly reviewed and updated when necessary.
Establishing the fund requires the asset to be set aside for member’s benefits. If rollovers, transfers or contributions are expected, a nominal amount may be held with the trust deed. The amount should be allocated to a member and regarded as a contribution.
If a member cannot contribute to the SMSF, discretion is applied to allow nominal contribution for the member. It must be allocated to the member for the purpose of registering the SMSF.
V. Check if your fund is an Australian Super fund
The SMSF needs to be an Australian super fund during the financial year to be compliant to laws and receive tax concessions. If it does not satisfy residency rules, it may become non-compliant and its assets and income may be taxed at the highest marginal tax rate.
Fund residency conditions
- The fund was established in Australia or that one of its assets are located in Australia.
- Central management and control of the SMSF is in Australia.
- The fund has active members who are Australians or Australian residents and hold 50% of the fund’s assets, and the sum of the amounts to be payable to active members if they decided to leave the fund. Or, that it has no active members.
What to do if members go overseas
If members go overseas for an extended period, it is best to seek professional advice about maintaining the residency status of the SMSF.
If the SMSF fails the residency test, the funds should be rolled over to a resident regulated super fund and wind it up. If not, it will become non-compliant.
VI. Register the fund and get an ABN
If trustees have been appointed and the fund has been established, trustees and members are given 60 days to register the SMSF with ATO by applying for an Australian Business Number or ABN.
Registration by Tax Professionals
Tax professional services can be used to register SMSFs and apply for an ABN on behalf of the SMSF members and trustees.
What do you need for registration and ABN application?
You might need your previous ABN or TFN, the type of fund, residency status, tax agent details, name of the SMSF, date on when the SMSF came into existence, SMSF business details, electronic fund transfer details, authorised contact details, associate details, and election to be regulated.
Registering for GST
SMSFs with annual GST turnover of more than $75,000 should register for GST which does not include contributions, interests, and dividends, and residential rent or income generated outside Australia. However, it included gross income from equipment or commercial property lease.
Check your registration status
Registration and Application Delays
ATO does not automatically accept every registration application. The registration will not be accepted if the SMSF has not completed the setup steps in Eligibility to register and get an ABN, if it cannot identify the SMSFs associates, and if the trustees are not able to run the SMSF within the rules.
ATO consider factors such as a history of insolvency, dishonesty crimes, previous SMSF history, lodgement and payment history, super balance and income and information about identities that have been fraudulently used.
Applications may be withheld and the SMSF will be informed about the investigations being made for it. Sometimes these can be resolved in under two months but may take longer with more extensive investigations and if the trustees do not assist in the investigation.
VII. Set Up a Bank Account
A bank account in the fund’s name should be made to manage the fund’s operations, for it to accept contributions, rollovers of super and income from investments. The account will also be used to pay for the fund’s expenses and liabilities. The financial institution details should also be provided to ATO.
The account of the fund must be separate from the trustees’ individual accounts and any related employers’ bank accounts.
Separate bank account for each member is not necessary but each member should have separate records of entitlement or what is called a member account. These member accounts should show: contributions made by or on behalf of the member, fund investment earnings allocated to each, payments of super benefits either through a lump sum scheme or income stream.
VIII. Get An Electronic Service Address
SMSF can receive contributions from employers by superstream data electronically.
Superstream applies to super contributions made by employers to any superfund. To receive superstream data, an SMSF needs an electronic service address, a special internet address but not an email address. The administrator will provide the address or use SuperStream message solution provider. Information like ABN, bank account details, and electronic service address are needed by the employer.
IX. Prepare an Exit strategy
Even during the set up phase of an SMSF, there is the need to consider what happens when it ends or winds up.
SMSF are sometimes difficult to manage because of relationship breakdowns, illness or accidents that makes a trustee incapacitated, or when a trustee dies. Thinking of an exit strategy even when you’re just setting up an SMSF is best to lessen the impact of unexpected events.
With this in mind, trustees must have access to the SMSFs records and electronic transaction accounts. They should also have specific rules on the funds’ deed to keep managing the fund well, require members to have binding death benefit nominations, have members appoint an enduring power of attorney and consider the costs in winding up the SMSF.
Kingston Knight Audit are the Auditor Melbourne experts to contact when dealing with your trust account audit, SMSF Audit, financial statement audit, and internal audit requirements. Contact us today, Kingston & Knight Audit offers a free telephone consultation to establish how we can best help you achieve the assurance and compliance you require.