Are you considering establishing a Self-Managed Superannuation Fund (SMSF) to take control of your retirement savings? Maybe you’re thinking it’s time you took the reins to provide for your retirement. SMSFs can provide you with many benefits in planning for your retirement, however, running an SMSF is not for everyone.
Let’s take Thomas, aged 51. Thomas has been married to Carla (48) for 23 years and they have three children. Thomas’ superannuation has been accumulating in his industry fund for his retirement since he was 17, when Thomas commenced an apprenticeship. Being young and uninterested, Thomas opened a standard industry account where his employer made contributions for him. Throughout the years, Thomas just left his account with very little oversight.
1) Make the decision
Thomas has become increasingly aware of the benefits of providing for his own retirement in about 15 years’ time. He feels it is the right time to take control of his future and maximise his retirement plans, now that his children are becoming financially independent.
Before Thomas jumps into establishing an SMSF, he needs to know what is involved and whether it is the right move for him. As trustee, he will be responsible for the fund complying with the superannuation and taxation laws.
An SMSF is nothing more than a tax structure, and to be eligible for tax concessions Thomas must ensure his SMSF is established correctly.
2) Determine the structure
Firstly, Thomas will need to determine the fund’s structure. An SMSF can have up to 4 members (it has been proposed to increase this limit to 6 in the 2018 Federal budget) and a trustee. A trustee can comprise of individuals (whom are also members of the SMSF) or a company (whereby all directors are members of the fund). Should Thomas be the SMSF’s sole member, he must have an additional individual trustee (who is not required to be a member) or he could be the sole director of the corporate trustee. Trustees (or directors) need to be legally able to be appointed trustee of an SMSF (i.e. not under any legal disabilities such as minors or have dementia etc).
Thomas, as trustee, has duties and responsibilities he needs to understand. He is ultimately responsible for the SMSF and its compliance with the relevant laws. Thomas must consent to being appointed as trustee (or director) and acknowledge that he is aware of his duties and responsibilities by executing a declaration within 21 days of being appointed trustee (or director).
3) The trust deed
An SMSF is established under a trust deed, a legal document that sets out the rules for establishment and operation of Thomas’ SMSF. The deed must be executed by all parties of the SMSF (i.e. members and trustees). The SMSF is bound by the deed and superannuation laws, known as its governing rules. To establish Thomas’ fund, assets must be set aside for the benefit of members. To facilitate this (prior to Thomas’ benefits being rolled into the fund) a nominal amount, of $10 for example, can be held with the deed, which is then allocated as a contribution to Thomas. In some states, this trust deed may need to be stamped.
4) Register with the ATO
At this point, Thomas has now established the SMSF and appointed trustees. As a trustee he now has 60 days to register the fund with the Australian Taxation Office (ATO) and apply for an Australian Business Number (ABN) and Tax File Number (TFN). As part of this application process, a requirement is the Trustees elect for the SMSF to be regulated to obtain the tax concessions available.
5) Establish a bank account
Thomas will be required to establish a bank account for the fund, to receive all contributions, rollovers and investment income and pay pensions (if applicable), as well as payment of general fund expenses. Thomas will need to ensure the account is in the name of the SMSF trustees and that it is kept separate from the trustee’s individual bank accounts. Once the bank account is established, Thomas is able to facilitate his rollover of superannuation benefits from his industry fund to his SMSF and advise his current employer of a change in his superannuation details so his superannuation guarantee and any salary sacrificed amounts are directed to his SMSF.
6) Develop an investment strategy
Prior to the Trustees investing the members’ contributions, it is a requirement that they develop an investment strategy for the SMSF. Thomas needs to document the strategy and continually review it to ensure it is, always, meeting the objectives and needs of members. Thomas would need to consider the personal circumstances of all fund members, expected risks and returns of fund investments, risk tolerance of members, benefits of investment diversification, asset classes and allocation, liquidity, members insurance requirements and the ability of the fund to pay benefits to members in their retirement.
There are many benefits for Thomas in establishing an SMSF to take control of his retirement. An SMSF can provide Thomas with full control of his retirement benefit, as he is able to decide what the fund invests in to maximise his benefits (with regards to his risk tolerance) and provides greater investment choice. An SMSF can invest in a wider range of investments that may not be available to Thomas if he were to keep his industry benefit. There are many more benefits of establishing an SMSF and these will range depending on his circumstances.
Always remember, an SMSF is established for the sole purpose of providing for your retirement or for your beneficiaries in the event of death. It is your money, but not yet!
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.
