How to set up an SMSF?

This is the first step as the trust will hold the fund’s assets. Based on whether it is a single-member trust or not, you need to choose the number of trustees and members. Additionally, the trust will need assets and identifiable beneficiaries.

The trust deed is the document that sets out the rules for establishing and operating the SMSF. It comprises details such as the fund’s objectives, winding up procedure, who can be a trustee, how and when the benefits will be payable, who the trustees are, when to make contributions, how trustees are appointed and removed, and who can be members.

It is recommended that you hire a legal expert to prepare the trust deed as it’s a complex document. The deed must be signed and dated by all the trustees. It is also important that the deed is regularly updated to accommodate any changes in the objectives or needs of the members or trustees.

As a trustee of an SMSF, you are required to sign a declaration stating that you understand your duties, obligations, and responsibilities. It should be in the form approved by the Australian Taxation Office (ATO) and completed within 21 days of your appointment as a trustee. Some of your duties as a trustee include:

• Honestly conducting all matters of the fund
• Taking required action to protect the assets
• Skilfully, carefully, and diligently managing the fund
• Separating personal assets and money from the fund’s assets and money
• Not entering into transactions that circumvent the restrictions on the payments of the benefits
• Refraining from any contracts that prevent you from performing your duties as a trustee

Within 60 days of the SMSF setup online, trustees have to lodge a formal election to the ATO. The election is irrevocable and advises the ATO that the fund will be governed by the superannuation legislation and entitled to the concessional tax rate of 15% applicable for complying funds. If you don’t lodge the election, the ATO does not consider your SMSF a compliant fund and taxes will be charged at the highest rate. Once the ATO processes your election and gives approval, you’ll receive an ABN and TFN for the fund.

An SMSF requires a cash account for three reasons:

• Holding the cash in its portfolio to accrue interest income
• Paying the fund’s expenses including accounting fees, the annual supervisory levy, and tax liabilities
• Accepting contributions and rollovers from the members

Generally, the ATO takes around 56 days to issue the ABN and TFN after lodging the election. These are issued only after the ATO matches your information with the details available in its database. In case of a mismatch, the time to set up the SMSF may be extended.

The setup time also varies based on your knowledge and the support you’re getting. The entire procedure from start to finish for setting up the SMSF can vary between four and six weeks.

Even though an SMSF is a long-term decision, you must be prepared for any unforeseen events that may require the fund to be wound up. Having an exit strategy in place to reduce the impact of such events is important. Some of the triggers that might cause an SMSF to wind up, include: 

• When trustees decide they no longer want to remain a part of the fund. This may happen when one of the trustees passes away, and the others no longer want to bear the administrative burden of managing an SMSF. Sometimes a divorce could also lead an SMSF to wind up when the partners are also the trustees of a fund.
• When all the members of an SMSF have received their retirement benefits or passed on.
• When the members of a fund decide to switch back to a regular super fund.
• When a trustee loses mental capacity they can no longer serve the role of trustee or be a part of an SMSF.
• When a trustee moves overseas and becomes a non-resident.
• When a trustee becomes a disqualified person and can no longer be a trustee or part of an SMSF. A disqualified person is someone who is an undischarged bankrupt or is convicted for being dishonest. 

While drafting an exit strategy for your SMSF, it helps to keep in mind the nature of the fund’s investments. In general, there are three exit strategies for an SMSF. These include:

•  Rolling over to a public offer fund. However, the investment options available may be limited compared to an SMSF.
• Converting to a Small APRA Fund (SAF), which is simply an SMSF with a professional licenced trustee. The rules around SAFs are quite similar to SMSFs, and could help members retain specific investments, such as property and collectables.
•  Paying out the benefits to individual members if a condition of release is met. 

It could be worth speaking with financial and legal experts while drafting an exit strategy for your SMSF to ensure the best possible recourse in case you need to wind up the fund. When defining the exit strategy, it’s also a good idea to ensure that all members are allowed to access SMSF accounts and other records for transparency and have binding death nominations in place.