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Writer's pictureSapphire Bay Partners

5 Key Steps to Setting Up and Managing Your Self Managed Super Fund (SMSF)

Updated: Apr 29

So you are considering setting up a Self Managed Super Fund (SMSF)? Sounds great! Today, we explain what is required to establish a SMSF and key considerations prior to making the leap.


Every Australian needs to invest in superannuation. Our system of compulsory super is in many respects the envy of the world and forms the cornerstone of our national strategy to fund our ageing population beyond retirement age.


Self-Managed Superannuation Funds (SMSFs) are a type of superannuation fund that allows individuals to take control of their retirement savings (i.e. your superannuation).


In today's feature article, we discuss what is required to establish and operate a SMSF for yourself.


So let's dive in!



5 Key Steps to Setting Up and Managing Your Self Managed Super Fund (SMSF) | Sapphire Bay Partners


Background


There are many benefits to starting a SMSF:


While you should assess your financial goals and considerations with a qualified financial planner in deciding whether a SMSF is right for you, once you do make the decision, there are some steps required to establish the SMSF, and that is where your accountant comes in.



Key features of a SMSF


Once you decide to establish the SMSF, you will need to create and finalise a superannuation trust deed.


Overseeing the SMSF, will be members, which is a fancy way of saying the people who will benefit from the superannuation. Specifically:


  • There must be no more than 6 members

  • All the members must be trustees or, if the fund has a corporate trustee, all the members must be a director of the corporate trustee

  • The money in the fund can only be used to provide for your retirement


Therefore, you can set up a SMSF which is owned for the benefit of you, and up to five others. These people can be totally unrelated to, but bear in mind, you will need to collectively decide on how best to use the fund for the purposes of each of your retirements.



SMSF basics


Make sure you have all the basics covered before you start because, when setting up a Self Managed Super Fund, there are many things to consider.


Corporate vs Individual Trustee of the SMSF


An SMSF (like any super fund) needs to have a trustee, as the SMSF is, in essence, a specific type of trust structure. You therefore have to decide whether an individual or corporate trustee structure is right for your SMSF. Your SMSF can have up to six members and all members must be trustees, or directors, if you've appointed a corporate trustee.


Generally speaking though, most accountants (including Sapphire Bay Partners) will recommend a corporate trustee. The reason for this is that it is easier to operate when the trustee is a corporate entity, there are fewer succession issues and there is greater liability limitation than having an individual trustee, especially when the SMSF is set up for more than one person (in which case all the beneficiaries / members need to be individual trustees).


Costs of establishing and running an SMSF


You also need to think about the costs associated with starting and running a SMSF. There's no legal minimum balance required to set up an SMSF, but it usually becomes commercially viable once you have a balance of $250,000 or more.


Costs to establish the SMSF can vary depending on your advisors, but will generally be a few thousand dollars to establish a standard SMSF. Once set up, you are looking at a few thousand again each year to handle the financial statements and tax return, to pay the annual supervisory levy to the ATO, and conduct an independent audit. You may also choose to pay for financial advice and insurance for members.


As always, if you are potentially interested in setting up a SMSF, feel free to contact us and we can provide more specific dollar amounts of the cost to establish and maintain the fund. No obligation - we are just happy to help!


Three things you need to set up a SMSF


  • First you'll need enough money in your existing superannuation fund to make the set up and annual running costs of the SMSF worthwhile. The exact amount of money needed within an SMSF to make it viable is a topic of some contention and will depend on factors including how involved you wish to be in making decisions and also what your future contribution strategy looks like (if you plan to rapidly inject contributions, a lower balance in the early days of the fund can be viable).

  • Next you'll need to budget for ongoing costs including accounting, tax, audit and legal fees, as well as the costs of financial advice if you choose to take professional advice on your investment strategy. These costs will eat into your investment returns so you need to ensure your fund is generating sufficient income both to cover the costs and to build up your fund long-term.

  • Finally, you'll need the financial skills – or access to others with the financial skills - to be confident that you're making the right investment decisions. You'll need to create an investment strategy that will generate sufficient returns to provide for you in your retirement.


Benefits and risks of setting up a SMSF


As discussed already, there are many benefits to starting a SMSF, though the main benefits are giving you control and, if you are business owner or healthcare professional, the powerful strategy of owning your business / practice through your SMSF, so that your business rent, in addition to your property equity and earnings growth in the SMSF, are all contributing to your super growth.


However, There are also some risks involved such as penalties for non-compliance, lack of statutory compensation and lack of access to conflict resolution channels if disputes arise.


Deciding if the benefits outweigh the risks is up to you – but be careful as you assess the information and don't be put off by some of the myths surrounding SMSFs.


Some key myths that persist around SMSFs are:


  1. You need to be wealthy to have a SMSF. While you need to have a substantial opening balance (around $250k) there's no minimum balance needed to open or run a SMSF. You can open and run it with any balance.

  2. SMSFs are too risky. You're in charge so the level of risk depends on how you choose to manage your SMSF. But getting the right professional help and support will ensure you comply with all the rules and minimise the risk factors.

  3. SMSFs are a simple way to buy property. There are numerous conditions associated with the purchase of property through a SMSF, so we recommend you research this option thoroughly and get professional advice before making any decisions.



Buying property through your SMSF


The most important thing to know is that buying a property through a SMSF doesn't follow the same procedure as buying a property personally. There are additional restrictions associated with getting a bank loan (including considerations for using a limited resource borrowing arrangement), and tax implications that need to be considered.



You should also know


  • Your SMSF only needs to be registered for GST if it owns a commercial property that receives rent of over $75,000 per year

  • It's important that you upgrade your SMSF Trust Deed and review it regularly to make sure you're complying with laws and getting full benefits

  • It's possible to invest in cryptocurrencies through SMSF, but there are conditions



Let us help you with your SMSF


Navigating the path to setting up and managing your own SMSF can be challenging, and it really helps to have knowledgeable advisors by your side to avoid making mistakes and running into trouble with the Australian Tax Office.


We're experts at what we do, and strongly believe in educating our clients to help them make the very best decisions. Our goal is to help you prepare for your future and to make the most of your money. We're on your side, and we will always advise you with your best interests in mind.


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Sapphire Bay Partners is always delighted to help!


We love working with dynamic, proactive clients and helping their businesses grow.


If you would like assistance, feel free to reach out to us.


Tel: + 61 3 9563 4666



Important Information

This is general information only so it doesn’t take into account your objectives, financial situation or needs. Sapphire Bay Partners is not giving you advice or recommendations (including tax advice), and there may be other ways to manage finances, planning and decisions for your business.


Carefully consider what’s right for you, and ask your lawyer, accountant or financial planner if you need help. Alternatively, feel free to reach out to Sapphire Bay Partners for assistance or referrals to an appropriate professional. We’re always happy to help!

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