When you set up a SMSF, you become the trustee of the fund, or director of a company that’s a trustee.
“In either case, you’ll be responsible for managing it according to its trust deed and the laws and rules that apply to SMSF’s,” the Australian Taxation Office (ATO) says.
“The key principle is that you run your SMSF for the sole purpose of providing retirement benefits to members.”
Your SMSF will be audited every year, so you need to keep heaps of records.
1. See an accountant
The first thing you need to do is see an accountant.
They’ll help you prepare your fund’s accounts and also its annual financial position, operating statements, SMSF annual return and also provide tax advice.
Alternatively, a fund administrator can help you manage the day-to-day running of your fund and meet your annual reporting and admin obligations.
A legal practitioner can prepare and update your fund’s trust deed and a financial adviser can help you prepare an investment strategy.
2. Work out the structure of the fund
You can choose one of the following structures for your SMSF.
It can either be a corporate trustee, where a company acts as a trustee for the fund, or you can have up to four individual trustees within the fund.
“Your choice of trustee will make a difference to the way you administer your fund and the types of benefits it can pay, so you need to make sure it suits your circumstances,” the ATO says.
However, Chan and Naylor managing director Ken Raiss says that it’s best to go with the corporate trustee option.
When this happens every member must be a director.
“You’ve got the SMSF super fund and you’ve got the holding trust (where ownership of a property is held).
Each of those needs a trustee and I would have a corporate trustee for both,” Raiss explains.
He says the first reason is that banks prefer corporate trusts when lending money in a SMSF, so it’s much easier.
But the second reason is for safety. “If a tenant ever sued, then woe betide, something happens and insurance doesn’t pay, then they’d go after the trustee.” he says.
“If it’s an individual, all their assets are potentially at risk.”
Another benefit of having a corporate trustee is that the Australian Security and investment Commission annual fee is just $40, rather than $230 for an individual trustee.
3. Ensure all members are eligible to be trustees.
In most cases, all members of the fund need to be trustees.
Anyone 18 years or over can be a trustee of a super fund.
The fund needs to meet the definition of an ‘Australian superannuation fund’.
If it’s non-compliant, the fund’s assets and its income would be taxed at the highest marginal rate.
4. Check your trust and trust deed
To create a trust, you need to have trustees, assets and beneficiaries.
A trust deed is a legal document that sets out rules for establishing and operating your fund.
It includes things like the fund’s objectives, who can be a member and how benefits are paid.
New funds usually appoint trustees within the trust deed. You also need to provide your tax file number.
5. Open a bank account for your fund
You need to open a bank account in your fund’s name to manage the fund’s operations and accept cash contributions and rollovers of super benefits.
The money can then be invested, according to the fund’s investment strategy, and used to pay the fund’s expenses and liabilities.
The fund’s bank account needs to be kept separate from each of the trustee’s individual bank accounts and any related employer’s bank accounts.
6. Register with the ATO
Once your fund is legally established and all trustees have signed a trustee declaration, you need to register the fund with the ATO.
7. Prepare an investment strategy
Before you start making investments, you need to have a written investment strategy.
It provides you and the other trustees with a framework for making investment decisions to increase members’ benefits for their retirement.
It should be in writing so you can show your investment decisions comply with it and the SMSF laws.
You should also consider whether to hold insurance cover for one or more members of your SMSF.
8. Ensure the property you want to buy is allowable
The property you purchase in a SMSF has to be a ‘single acquirable asset’.
“A lot of people will go and buy a block of land and then they want to build on it,” Raiss says. “That’s two assets.
You can’t borrow money for it, as the first asset was the land and the second was the building. You have to be careful.”
9. Make sure your loans have pre-approval
Raiss has seen many people purchase property in their own name, then try to transfer it into a SMSF.
This is a big mistake and not allowable, he says.
“You can borrow from a bank but imagine you’re a bit short. Some people could go and get the equity outside or do a loan through their super fund. It’s called an ‘associate party loan’,” Raiss says.
“Now imagine you don’t have enough inside your super but you have a lot of money outside super.
You can contribute that money to super but the problem is if you’re young and you put the money in, you can’t get it out. You therefore need to work out the loan first.”
10. Make sure any rollover from an existing fund is done correctly
Raiss warns you need your own SMSF to buy a property within a fund.
“Some people are in a government fund that have defined benefit schemes,” he says.
“They won’t let you roll it over. It’s only the market-linked funds where you can rollover funds. Also, if you have insurance, such as life insurance, you want to make sure you can get it in your SMSF.”
11. Set up the correct documents
The structure of a SMSF can be complex and so getting it right early is imperative. “The other thing a lot of people ignore is if their super fund has shares and they want to buy a property and use super as a deposit, they need cash,” Raiss says.
“They need to convert their share into cash. That’s a capital gains tax even. We tell people to get a cash balance instead and that’s also why we advise people to get pre-approval and do rollovers.”
12. Purchase the property
Raiss warns that the name on the contract of the property has to be in the correct structure before you buy.
“You can’t go and buy a property and then say ‘I’ll now put it in my SMSF,” Raiss says.[sam id=47 codes=’true’]
“One of the biggest mistakes we find is people go to auction, they buy a property, and then they want to put it in their super.
You can’t sell a residential property that you own into your super fund. It could cost you a second stamp duty.
But even without that, the law prohibits buying a residential property from a member or associate of the member.
You can buy listed shares and commercial property, but not residential.”
Raiss believes it’s imperative to have life insurance when it comes to purchasing property in a SMSF.
“If one person leaves (the super fund) they might have to sell. So imagine if one person dies. Just having life insurance outside your super isn’t enough.
You need it in the super fund correctly established, so the member’s death benefits payment can be used as part of (paying off) the debt.”
Always see an accountant first.
This article first appeared in Australian Property Investor Magazine – Australia’s #1 Magazine for property investors and is republished with their permission.