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SMSF Trustee Companion
If you are thinking about setting up a SMSF, there are a number of decisions you will need to make regarding the structure, operation and management of your fund.
To help you understand the process and decisions involved, the ATO has recently identified 5 key aspects that you should consider in setting up a SMSF. The 5 key aspects are summarised below:
1. Deciding to set up a SMSF
You need to think about the purpose for which you are setting up the SMSF and whether you have enough time, skill and money to manage the fund.
2. Preparing to set up your fund
You must decide whether to set up the fund with individual trustees, a corporate trustee or as a single member fund. There are different
requirements under each structure for the fund to be considered an SMSF, and all trustees must be eligible trustees.
3. Getting your fund started
A trust deed needs to be prepared and executed to create the SMSF. To be legally established, trustees must be appointed and the fund must acquire assets. The fund should then be registered with the ATO.
4. Starting to operate your fund
Every SMSF needs an investment strategy outlining the fund’s investment objectives and action plan. All contributions and payouts must be in
accordance with the fund’s deed and super laws, and accurate records of the fund’s activities must be kept.
5. Understanding your role and responsibilities
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SMSF Trustee Companion
1.
Deciding to set up an SMSF
Managing a super fund requires time, skill and knowledge, along with money and assets to make the fund viable. The purpose of any SMSF must be solely to pay retirement benefits to members, and the decision to set up a SMSF should only come after comparing this with other retirement savings options.
A SMSF requires a trustee – i.e. an individual or company that holds and invests the fund’s assets for the benefit of the members’ retirement. Upon setting up a SMSF, you will take on the role of either the trustee, or the director of a company that is a trustee – also known as a corporate trustee.
While being a trustee or director of an SMSF allows you to make your own investment choices, it carries with it the responsibility of managing the fund and making decisions which are in the best interests of all the fund members.
With a SMSF you have the ability to: Control
Leverage
Purchase direct Property
Manage life and disability insurance Increase asset protection
Manage the asset for the family while minimising their taxes Property Development
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SMSF Trustee Companion
The Enduring family Superannuation FundTM Deed was developed with these objectives in mind. It is a flexible SMSF for the family, controlled by the family for their long term financial care with significant tax and estate planning advantages.
It was set up to more easily increase and leverage its practical benefits with the help of a family superannuation fund advisor. It incorporates all the legislative requirements which our experience shows are absent from traditional retail, industry and master funds as the rules in these funds must be written to cater for all members not just for the benefit of a few. Therefore they exclude many practical benefits not because they are not allowed but because some members may not wish these rules to apply. Within the family environment this should not be an issue as you are controlling your own funds and no external parties are involved.
Our Enduring Family Super Fund includes the following benefits:
1. Proportional voting.
2. Potentially retain funds in the SMSF for the family after member’s death. Payments to family members can have taxation consequences as well as asset protection issues and so retention of monies within the fund can prove beneficial.
3. Anti Detriment Deduction. T
4. Termination Payment on Death and Disability.
5. Ability to define financial dependents.
6. The ability to incorporate a SMSF Will. Remember your super does not automatically form part of your estate and must be treated accordingly as it is not part of your normal will.
7. Allows for an easier creation of a valid Binding Death Nomination.
8. Use of lump sum payment strategy in transition to retirement
9. Auto Reversionary Pensions.
10. Improved Asset protection.
11. Ability to include children under 18 years of age
12. Self Insured Life Cover. A SMSF may be able to claim a tax deduction for a deemed premium for life cover it creates for a member.
13. Allows for multiple pensions to reduce impact of proportional allocations to better utilise the taxable and non taxable components of your pension.
14. Allows for transition to retirement pensions, withdrawal and re-contributions.
15. Inject non concessional contributions into new super account which has no taxable balances to ensure this injection generates a pension which is primarily all non taxable.
16. Segregate your assets each 1 July so that the better performing assets are allocated into pension stage with the higher non taxable proportion when other members are in accumulation.
17. Ability to cancel pension payments and restart when fund values fall as any reduction in fund values are first allocated to taxable balances.
18. Capacity to allow for borrowings to purchase residential property and business real property.
19. Ability to terminate members who may not be in agreement with majority members.
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SMSF Trustee Companion
2.
Preparing to set up your fund
If you have made the decision to set up an SMSF, the next step is to choose the structure of the fund, keeping in mind that each structure has different requirements for it to be a complying SMSF under super laws.
If the fund has individual trustees, it must have four or less members to be a SMSF, where each member is a trustee. Compared to a corporate trustee, a fund with individual trustees can be less costly to establish and is subject to fewer reporting obligations.
If the fund has a corporate trustee, it must also have four or less members, where each member is a director of the company and each director of the corporate trustee is a member of the fund. While directors of a corporate trustee must comply with more rules than individual trustees, such as the Corporations Act 2001(Cth), having a corporate trustee can make it easier to keep fund assets and business or personal assets separate.
A third option is to set up the SMSF as a single member fund. In that case, the fund can either have a corporate trustee or have two individual trustees where one person is a member.
In most cases, all members of the fund will need to be trustees, so you must consider whether the members are eligible to be trustees. Generally, persons over 18 are eligible, provided they are not under a legal disability and are not a disqualified person. For a corporate trustee, the responsible officer, along with the trustees and directors of the company must not be disqualified.
In addition, to be a complying fund and obtain tax concessions, the fund must come within the definition of an “Australian super fund” for tax purposes.
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SMSF Trustee Companion
3.
Getting your fund started
It is important that your SMSF is set up correctly to ensure it is a complying fund, it is easy to administer and is able to pay benefits as required.
All SMSFs are a type of trust, and hence a trust must be created for each fund. This requires the preparation of a trust deed, along with the identification of trustees, assets, identifiable beneficiaries and the intention to create a trust.
The trust deed sets out the rules for establishing and operating the fund, and should be prepared by a legal professional. The deed should reflect the objectives of the fund, the composition, appointment and removal of trustees, and the method and timing of benefit payouts. It should be updated as necessary to remain current with respect to members’ needs and super laws.
A trustee of a superannuation fund must act according to the terms of the trust deed of the fund. If superannuation law changes, the trust deed of the fund may need to be updated.
The Trust Deed documents the rules that the fund must operate within, such as/including:
the appointment and removal of the trustee to the fund;
the admission of members to the fund;
the appointment of various professional advisers to the fund (including the SMSF adviser, the administration and the auditor);
trustee meetings, voting guidelines, minutes and how the meetings are to be run;
the establishment of the funds cash account;
the setting of an investment objective and strategy for the fund and its members;
the types of investments that the trustee is able to invest in;
the acquisition and disposal of assets;
the approval of making benefit payments to a member;
the payment of death benefits to dependants or legal personal representative of a deceased member;
the acceptance of a death benefit nomination form and the establishment of a death benefits policy;
the payment of a disablement benefit to dependants or legal personal representative of a disabled member;
the acceptance of a disablement benefit nomination form and the establishment of a disablement benefits policy;
the retirement of members as members of the fund;
the establishment of members’ accounts, accounts of the fund, audit reports and any notifications to members required under the trust deed or Superannuation Industry (Supervision) Act 1993 (SISA) and;
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SMSF Trustee Companion
All trustees and directors of corporate trustees need to consent to their appointment as trustees, and sign a trustee declaration within 21 days of appointment.
An SMSF must hold assets to be legally established. This is usually achieved by making a contribution to the fund at the time of executing the trust deed. All assets must be protected by accurately recording their ownership. Fund assets, other than money, should be held in the name of either the individual trustees as trustees for the fund, or the corporate trustee as trustee for the fund.
To avoid the possibility of additional tax liability on certain member contributions, each member’s TFN must also be recorded.
Once the fund has been legally established, it must be registered with the ATO. For an SMSF to be a complying fund and obtain tax concessionary treatment, you must elect for it to be regulated within 60 days of its establishment. All funds are then issued with a TFN and ABN.
A bank account will need to be opened in the fund’s name to manage the fund’s operations and for the receipt of cash contributions and rollovers of super benefits. Account records should be kept for each member, detailing their contributions, any fund earnings allocated to them, and any payments of super benefits made to them.
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SMSF Trustee Companion
4.
Starting to operate your fund
An investment strategy must be developed to document the fund’s investment objectives and how you plan to achieve them.
There is a danger that trustees will not give due consideration to diversification and, accordingly, medium to long term returns may be lower than those achieved from a public superannuation fund.
In formulating an investment strategy, trustees must consider all of the fund members and the dates at which they will retire, and manage the fund assets to be able to make the retirement benefits available on these dates. These skills as well as being able to watch the investment markets are not acquired easily.
Trustees of self-managed superannuation funds need to measure their fund’s performance in the same way as public superannuation funds. For example, reductions in the market value of assets need to be taken into account when measuring fund performance.
The additional responsibility you take for the legal status and investment performance of your SMSF should not be taken lightly.
Your SMSF is required to have an Investment Strategy that seeks to maximise the member’s benefits. The key aspects of the Investment Strategy are:
The trustees of a SMSF are solely responsible and directly accountable for the management of their members’ benefits. They can use an adviser but in the end it is their responsibility;
as part of this responsibility the trustees of a SMSF are required to prepare and implement an investment strategy for the superannuation fund;
the strategy must reflect the purpose and circumstances of the fund and have particular regard to the membership profile, benefit structure, tax position and liquidity requirements of the fund;
an investment strategy should set out the investment objectives of the fund and detail the investment methods the trustees will adopt to achieve those objectives;
it is the trustees’ duty to make, implement and document decisions about investing fund assets and to carefully monitor the performance of those assets;
the trustees must ensure all investment decisions are made in accordance with the investment strategy; and
breaches of the investment strategy requirement may result in the trustees being fined or sued for loss or damages. In addition, the fund could lose its complying status.
A financial advisor may help devise the strategy; however, the trustees of the fund are ultimately responsible for managing the fund’s investments.
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SMSF Trustee Companion
In determining whether your fund can accept contributions from a member, consider the type of contribution, whether there is a cap on contributions which the member has exceeded, the member’s age and whether they provided their TFN.
In general, an SMSF can accept employer contributions, personal contributions, salary-sacrifice contributions, super co-contributions and eligible spouse contributions. However, check the rules governing your fund to clarify this position.
As a trustee, you must develop a method for keeping accurate and current administrative and financial records for the fund. These can be important in supporting the decisions you make on behalf of the fund and in helping auditors assess the fund’s compliance with super laws.
One of the requirements under super laws is that each SMSF appoint an approved auditor to audit the fund’s operations each year. If the fund begins paying a pension to any member, an independent actuary may also need to be appointed.
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SMSF Trustee Companion
5.
Understanding your role and responsibilities
Ultimately, it is the trustees who are responsible for complying with tax and super laws, even if financial and legal advisors provide guidance. The ATO can impose penalties for compliance, including declaring the fund as non-complying and disqualifying trustees.
While an SMSF allows trustees to make their own investment decisions, these need to be made in accordance with the fund’s trust deed, investment strategy and super laws. In particular, they must comply with certain investment restrictions contained in super laws. A legal advisor can help determine whether your fund’s investments comply with these restrictions.
Keeping proper records is imperative for the fund’s audit to be properly executed each year. As trustee, you are responsible for ensuring that the auditor’s report is lodged with the fund’s annual return.
The decision to set up a SMSF is only the first of many which must be made in order to establish an effective and viable super fund. Some of the decisions and processes involved can be complex, so it is critical you seek advice from legal advisors with expertise in superannuation law.
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SMSF Trustee Companion
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Firms Australia. We have offices in Brisbane, Gold Coast, Sydney (3 locations), Melbourne and Perth.
At Chan & Naylor you can count on our knowledge and expertise in the following areas:
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If you want to discuss any of the strategies please contact Chan & Naylor via
www.chan-naylor.com.au or on 1300 250 122 where you will be able to arrange a suitable time to
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