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6 things you need to know before you set up an SMSF

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The decision to take control of your superannuation and establish a Self Managed Super Fund (SMSF) will be one of the most important financial decisions that you will make.  Establishing a Fund can be a great way to take control of the dollars you're saving for retirement by putting you in the driver's seat when it comes to all decisions - investments, insurances, management - in relation to your fund. For people whose circumstances warrant use of an SMSF, some this can be brilliant, for others it can be less than ideal. Not getting it right can simply get you lost and unsure of which direction you need to turn.

There are many great reasons for setting up a SMSF, but there are some things you should be aware of before taking the plunge. Here are our top 5 things that you should understand before setting up your very own self-managed superannuation fund.

1. Which trustee structure is right?

The decision to establish a corporate trustee or have individual trustees is one of the initial important decisions to be made. You can choose one of the following structures for your fund: up to four individual trustees or a corporate trustee (essentially, a company acting as trustee for the fund). The two structures differ in terms of:

  • Member and trustee requirements
  • Cost
  • Ownership of fund assets
  • Separation of assets
  • Penalties and Succession. 

You should discuss the decision about structuring your find in a way that best suits you with an SMSF professional. 

2. Importance of the Trust Deed

The trust deed is your fund’s most important document as it outlines the rules that you fund must comply with.  Your Deed should allow you access to all (or most) of the strategies available within superannuation law. An SMSF must operate in accordance with the Fund’s deed.  If the law changes, the deed may be required to be updated.  For example, if you wanted to purchase a property using the appropriate borrowing rules, your Deed needs to be dated after 24 September 2007 when the legislation was introduced or updated to reflect the changes. People understand that a car needs to be serviced regularly for it to run at its optimum performance An SMSF is no different – to take advantage of strategies when legislation changes, a deed update will allow for the fund members to take advantage of these new strategy opportunities.

3. Developing an Investment Strategy

Trustees of an SMSF are required by law to prepare an investment strategy or plan.  This strategy is the responsibility of the trustees to manage the members’ benefits and they are ultimately accountable for the fund’s performance.The trustee is duty bound to formulate, carry out and document decisions about how the fund invests and to regularly monitor their performance. 

4. Understanding your Funds' obligations

Fund Trustees are ultimately responsible for ensuring that the SMSF remains compliant including the annual financial statements, member statements, SMSF Annual Return, and independent fund audit. The fund may be also required to prepare Instalment or Business Activity Statements, PAYG Summaries for pension members aged 60 and over. 

5. Ensure your super fund meets the "sole purpose test”.

This states that SMSF funds are maintained for the sole purpose of providing retirement benefits to members, or their dependents. This means there are restrictions and rules as to what a SMSF can invest in. For example, if investing in collectables such as artworks the SMSF members cannot have access to this - that means no hanging the piece in the living room for all to enjoy

6. Know your related party transactions.

There are rules around how a SMSF can deal with related parties, most of which either rule them out altogether or require the dealing be at arm’s length or on a commercial basis. A popular example is when a SMSF owns a commercial property and leases it to a member's business in which case there must be a proper lease in place and rent needs to be paid at market value - just the same if an unrelated party was renting the property. Members and their associates cannot borrow money from the super fund. Super funds also cannot acquire assets from members, however there are two notable exceptions, those being business real property and listed securities. Either of these must be acquired at market value and on an arm’s length basis. 

An SMSF is not for everyone. If you'd like to speak with someone about your options when it comes to your superannuation why not get in touch today? We'd love to help and are able to advise on establishing super funds as well as the ongoing management and compliance.

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