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Chapter 2 - Setting up your SMSF

Now that you have thought about starting a SMSF and evaluated whether this is the way for you to go, this section will guide you through the steps involved in setting up your SMSF. Usually, your accountant or tax agent will do this for you, and the one-off set up cost will likely be in the range of $1,000 to $2,000 depending on the accountant and the online service that your accountant uses. The advantage of this is that it saves you time and effort in doing it by yourself.

You need to be aware before delving into setting up your SMSF, there is a sole purpose test that is required to be maintained throughout the life of the SMSF. According to the ATO, "your SMSF needs to meet the sole purpose test to be eligible for the tax concessions normally available to super funds. This means your fund needs to be maintained for the sole purpose of providing retirement benefits to your members, or to their dependants if a member dies before retirement.

Contravening the sole purpose test is very serious. In addition to the fund losing its concessional tax treatment, trustees could face civil and criminal penalties.

For example, it’s likely your fund will not meet the sole purpose test if you or anyone else, directly or indirectly, obtains a financial benefit when making investment decisions and arrangements (other than increasing the return to your fund).

When investing in collectables such as art or wine, you need to make sure that SMSF members don’t have use of, or access to, the assets of the SMSF.

Your fund fails the sole purpose test if it provides a pre-retirement benefit to someone – for example, personal use of a fund asset."

Having now considered the sole purpose test, if you do not have a large amount to set up a SMSF, then maybe now is not the right time, due to the cost of setting up the fund and the annual costs of operating the fund. However, it is assumed that you have a decent amount to be able to set up, operate and maintain your SMSF.

If you wish to set up your SMSF by yourself, you will save the one-off cost but you need to take time and extra care to ensure all the information you provide online is correct and up to date. One website that is recommended is www.trustdeed.com.au. This website enables you to set up your SMSF, and after inputting all your relevant information, you will be provided with a SMSF Trust Deed along with the rest of the documents to prove that the SMSF is registered.

The following steps need to be considered when setting up your SMSF:

1 What is the name of your SMSF? For demonstration purposes, we will use ABC Superannuation Fund.

2 Who will be the trustee/s? You will have come across the term trustee and Trust before. Basically, a SMSF is a Trust, but unlike a normal Trust, the funds in your SMSF is not available to you until you reach retirement or preservation age. We will discuss a company trustee and individual trustee later in this chapter. For this purpose, let us choose the trustee company as ABC Pty Ltd. For a company trustee, there will be a fee payable to the Australian Securities & Investment Commission (ASIC) upon registering the company, and the annual ASIC fee will be around $55.00, as this company will only serve as a trustee for the SMSF. It is a special purpose company, so the registration fee will not be around $270 each year like a normal company.

3 Who will be the member/s of the SMSF? You can have from one to four members according to the SIS Regulations.

4 Who will be the director/s of the trustee company? Please note that if you are setting up a trustee company, then each member of the SMSF must also be directors of the trustee company.

5 Who will be the shareholder/s of the trustee company?

6 Enter all your information, including addresses and dates of birth as required when registering your SMSF and trustee company.

7 You must apply for an Australian Business Number (ABN) and Tax File Number (TFN) for the SMSF. This is available when completing the registration process. However, you do not apply for an ABN and TFN for the Trustee Company because it cannot trade in its own capacity. It is solely acting as a trustee for your SMSF.

After putting all this information in the online system, the website (for demonstration purpose we will use www.trustdeed.com.au) sends all this to ASIC and to their solicitors to prepare the SMSF Trust Deed and Company Constitution. In a matter of minutes, you will receive an email with all the documents to verify that the SMSF and Trustee Company are both registered and set up. You will also receive the ABN notice for your SMSF by email. A TFN notice will also be mailed you your address that you included while setting up your SMSF.

Having set up your SMSF and received all the documents, the Trust Deed is not required to be stamped, and stamping amount is not required to be paid for an SMSF Trust Deed. The Trust Deed is a legal document that is prepared for the trustee/s of the SMSF that enable the SMSF to invest in any type of asset, and also enable it to borrow for a specific asset. The Trust Deed covers the areas of the SIS regulations and is recommended to be updated every 3-4 years to incorporate changes in the superannuation and SMSF laws. One recommendation with the Trust Deed is for you to get the front page and the execution section certified by a qualified person, usually your accountant, lawyer or financial adviser.

You need to keep all the records of the Trust Deed, ABN, TFN and Trustee Company documents somewhere on your computer and have a back-up, as these are very important documents.

The next step is that you need to open a bank account for your SMSF. The bank can be a bank of your preference, and the name of the account will need to be, for example, ABC Pty Ltd ATF, or, ITF ABC Superannuation Fund. You will need to quote your SMSF ABN and possibly the Australian Company Number (ACN) of the Trustee Company, along with its name.

Later on, you can also create a share trading account in the name of your SMSF, preferably with the same bank that your SMSF account is in. Otherwise, you can use a broker if you have a good relationship with one, but usually the brokerage fees will be a little higher and there will be advisory and administration costs.

Previously in this section, you read about a corporate, or company trustee and an individual trustee/s. What is the difference, and what are the pros and cons of having either as trustee for your SMSF?

If you are the only member of your SMSF (there is no law against that), you must have a company trustee, and cannot be an individual trustee. If you wish to set up your SMSF as an individual trustee, then you must have someone else to act as another trustee in your SMSF. That person does not need to be a member.

If you have a spouse and you both wish to be members, then you have two options in your SMSF - you can both be individual trustees and members of your SMSF, or you can have a company trustee, but both members must be directors of the company trustee, and cannot be disqualified persons listed on the ASIC register.

If you have children and wish for them to be members of your SMSF, you can have up to two children, because an SMSF can have up to four members, so you, your spouse and two children, or perhaps if you have only one son/daughter, then they can be a third member. Please bear in mind that if you have a company trustee, then all SMSF members, children included, must be directors of the company trustee. What if a son/daughter is a minor (under 18 years)? The company law allows a minor director, but he/she will not be able to serve in their functions as directors until they reach 18 years old. In this case, the adult member/s of the SMSF will have the power of attorney to sign on behalf of their son/daughter who is a minor. In the case of a SMSF trustee company, this will not be complicated, because the company is there to act solely as a trustee for the SMSF.

So now that you have decided the SMSF structure, the advantages of a company trustee are:

 Companies have the benefit of limited liability. Therefore, if a company trustee suffers any liability, the individual directors will not suffer personal liability (other than in exceptional circumstances). On the other hand, an individual who acts as trustee exposes their personal assets if they incur any liability as trustee of an SMSF or other trust: if the individual's right of indemnity against the SMSF is not sufficient to discharge the liability, then the individual is still liable for the shortfall.

 A company continues to function even after the death of one of its directors, therefore, the control of a SMSF or other trust can continue even after the death of an individual SMSF member/director.

 It is easier for a corporate trustee to ensure that trust assets are kept separate from the personal assets of SMSF members.

 It can be simple and more cost effective to make changes to the directors and members.

 Legal ownership of the SMSF assets does not change when a member or director is removed.

On the other hand, SMSF company trustees also have some disadvantages, including:

 additional expenses – because you’re setting up a company, there are more establishment and running costs involved (unless you set up a special purpose company whose only purpose is to act as your SMSF trustee; in this case, the running costs can be reduced, and you don’t have to lodge an additional tax return for the company, only for your SMSF).

 your SMSF is also bound by corporation legislation and the trustee company must comply with ASIC and the Corporations Act 2001.

Some advantages of having an individual trustee/s are:

 no ASIC forms to complete to establish the SMSF;

 no ongoing ASIC reporting obligations to comply with; and

 fewer procedural issues to deal with, as there are more flexible requirements for holding trustee meetings and no need to comply with a company constitution.

However, the disadvantages of having an individual trustee/s are:

 always having to have two trustees, which can cause some issues especially when an individual trustee dies or becomes mentally unfit to continue acting as a trustee, or becomes disqualified.

 it may be time consuming and tedious to add or remove members and change the ownership of your assets.

 having trustees as legal owner of assets can easily lead to SMSF and personal assets inadvertently being mixed, for example, the name of the assets are in individual names, and must contain the following ‘ATF’. If this is not the case, then there can be errors when preparing and lodging annual tax returns.

 Declarations of trust may be required for certain asset types, such as property.

 ATO administrative penalties apply to each individual trustee. This can result in penalties of up to four times that of a corporate trustee.

Now that you have weighed the pros and cons of using a trustee company versus individual trustees, you are in a good position to decide on whether to set up a company trustee, or have at least two individuals act as trustees in your SMSF.

References:

Australian Taxation Office - https://www.ato.gov.au/super/self-managed-super-funds/investing/sole-purpose-test/#:~:text=Your%20SMSF%20needs%20to%20meet,a%20member%20dies%20before%20retirement.

Dixon Advisory - https://www.dixon.com.au/smsf/smsf-trustee-individual-or-corporate

Thomson Reuters Cleardocs - https://www.cleardocs.com/clearlaw/superannuation/smsf-corporate-individual-differences.html