What is SMSF? Here’s how to get started

Understanding the detailed workings of superannuation can be a daunting task, especially for young Australians unfamiliar with finance management. Meanwhile, those exploring the option of self-managed super funds (SMSF) might have a lot on their plate to begin with.

To the uninitiated, SMSF is a superannuation trust structure that offers benefits to its members upon retirement. It allows individuals to become a trustee in their own superannuation funds. One can also say that an SMSF enables greater control over one’s super fund money.

Notably, SMSFs can have no more than six members, responsible for building and managing the fund. All SMSF investments are rolled out in the name of the fund and are controlled by the trustees. Such funds are set up to provide members access to financial benefits in retirement or to their beneficiaries on death.

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How does an SMSF work?

As SMSFs are private super funds, they can be managed by the members themselves. Unlike a retail or an industry super fund, managing one’s own super means choosing the investments and the insurance for that super. Evidently, this is no easy task and requires a thorough understanding of the risks that come with each investment.

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Even as members are allowed to bring a corporate trustee to the fund, they hold full responsibility for it. Members of the fund act as directors when a corporate trustee is present. Corporate trustees are companies that take up part of the responsibility of setting up the fund.

With the help of these companies, recording and registering of assets becomes easier. This structure provides administration efficiencies as well as flexibility in membership. However, corporate trustees must be paid an additional fee for their services.

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Steps to set up an SMSF

It is imperative to set up your SMSF correctly, so that it can receive contributions, becomes eligible for tax concessions and is as easy as possible to administer.

• Building a trust: After the trustees or directors have been chosen for the fund, the first and foremost step for establishing an SMSF is creating the trust. For building a trust, the individual needs directors of a corporate trustee or trustees, a trust deed, assets to provide legal backing to the trust, and identifiable beneficiaries.
• Setting up the trust deed: The next important step is setting up a trust deed, which is a legal document setting out the rules and regulations for operating the fund. Essentially, super laws and the trust deed together form the fund’s governing rules.
• Becoming a complying Australian super fund: Once the deed is established, the trustees must check whether it complies with the residency conditions required to be an Australian super fund. If these conditions are not fulfilled, then the assets in the fund and incomes are taxed at the highest marginal tax rate.
• Getting an ABN: The trustees or directors of the fund can then register their SMSF by applying for an Australian Business Number (ABN). Individuals should ask for their Tax File Number (TFN) and opt for an ATO-regulated SMSF to receive tax concessions during this process. Individuals can also register for GST if required.
• Opening a bank account: Afterwards, trustees need to open a bank account in the name of the fund to manage the fund’s operations. All the financial activity in the fund would be done using this bank account. The bank account must be unique to the SMSF and recorded correctly with the Australian Taxation Office (ATO).
• Get an ESA: Under the recently instated guidelines, funds would have to be electronically linked with SuperStream if an individual’s SMSF receives contributions from employers. SuperStream is a data and payment standard applying to all super funds, including SMSFs. SuperStream requires an electronic service address (ESA) and can help users to rollover to or from their SMSFs.
• Formulating an exit strategy: Finally, the members must devise an exit strategy while setting up the fund. This includes accounting for unforeseen events such as the death of a trustee or a fallout between the trustees.

What does it cost to run an SMSF?

For the establishment of the trust without a corporate trustee, the basic requirements could cost individuals a minimum of AU$500. However, if a corporate trustee came on board, then the setup cost would be higher. According to a statistical report published by the Australian Taxation Office (ATO), the average operating cost of running an SMSF was AU$6,450 in 2019, while the median cost was AU$4,069.

Individuals can also consider taking some financial advice, which is crucial for those who have little knowledge about setting up a trust fund. The ATO, the official regulator of SMSFs, suggests that individuals should consider appointing professionals early on to ensure that a solid foundation is laid for the fund.

Overall, the setting up process might take around 3-5 weeks, including the documentation work. Another 3-4 weeks’ time may be required for the transfer of any existing superannuation balances to the new SMSF.

While SMSFs provide an exciting opportunity for individuals who wish to gain control of their super funds, they also come with various risks. Choosing the right investments is imperative to ensure that one’s SMSF turns out to be profitable.

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