Setting up a SMSF

One of the key components when setting up an SMSF is that a trust deed will need to be obtained. The trust deed is the rule book that, along with superannuation laws, will govern the fund's operation.

When establishing a trust deed, it is important to remember that they can be tailored to provide flexibility. For example a trust deed can be designed to pay pensions in retirement or following the death of a member, or to provide the ability to have children join the fund.

A trustee structure will also need to be chosen. An SMSF can either have a corporate trustee, or individual trustees. Some of the benefits of each are listed below.

 

Corporate trustee

Individual trustees

Simpler ownership of fund assets

When members join or leave a fund (including the death of a member) with a corporate trustee, there is no need to update the ownership of investments, bank accounts, property titles etc. which would normally be required when individual trustees are involved. This can be cumbersome and costly. By using a corporate trustee to hold assets, it is also easier to distinguish between fund assets and assets that are personally owned by the fund's members.

Cheaper to set up and run

As a company does not need to be formed, there are fewer costs involved in setting up the fund initially. There is also less cost involved each year as, for example, ASIC company returns are not required.

Borrowing

Where the SMSF intends to borrow money to invest, it is often a requirement of commercial lender's that the fund has a corporate trustee.

Less severe penalty regime

Where a corporate trustee is in place, penalties for breaches can be much harsher than those levied where individual trustees are in place.

Single member funds

Where a fund has a single member, using individual trustees will require appointing a second individual trustee (in addition to the member) – in some cases this may be undesirable. With a corporate trustee, the single member could also be the one and only company director.

Less complexity

Having individual trustees reduces some of the complexity of running a fund. For example, there is no need to follow a company's constitution (in addition to the trust deed and superannuation laws) when holding meeting's and/or making decisions.

Regardless of which trustee structure is chosen, the operation of an SMSF can be generally summarised by the illustration below:

 

Once you have decided on an appropriate trustee structure, have obtained a trust deed, and the fund has been properly registered with the taxation office, the fund is ready to go.

What else do I need to know?

By setting up and agreeing to be a trustee of your SMSF, you take on all the responsibilities that are associated with running a superannuation fund. In the worst case scenario, there are significant tax penalties and potential gaol sentences if you get things wrong.

However, there are many professionals who can help to make sure you remain on track and out of trouble – including financial planners, accountants, solicitors, and dedicated SMSF administrators.

It is also important to remember that just because you run your own superannuation fund, you still need to obey the superannuation and taxation laws that apply to superannuation in general. This means for example that you cannot access money from your SMSF for personal reasons before you are legally able to do so (usually upon retirement).

And finally, while an SMSF provides greater investment choice and the opportunity to hold certain assets such as property, it is critical to remember that these assets belong to the superannuation fund. As such, they are being held for the purpose of providing retirement benefits for yourself and/or fellow fund members. And, while personal use of certain assets may be allowed, all dealings involving you and your SMSF need to be done in a commercial manner, that is, in much the same way as if you were dealing with a total stranger.