A self-managed super fund (SMSF) is a super fund controlled by its trustees. A self managed super fund (SMSF) is a trust structure, established through a trust deed that can be used to manage retirement savings on behalf of its members.
SMSFs are established for the sole purpose of providing financial benefits to its members in retirement, and can be passed to beneficiaries upon death.
The difference between an SMSF and other types of fund is that the members of an SMSF are usually also the trustees. This means the members of the SMSF run it for their own benefit and are responsible for complying with the super and tax laws.A self managed super fund (SMSF) is limited to four members. It can provide the members with greater control over their super fund assets. In order for an SMSF to receive concessional tax treatment it must elect to be regulated by the ATO.
Who can be the trustee of a SMSF?
- An SMSF can either have individual trustees where all the members of a SMSF must be a trustee.
- Or it can have a corporate as trustee where all members must be directors of the trustee company.
- Special rules apply to single member funds, members who are minors, and funds when a member has died.
Single member funds
- If the fund has only ONE member the trustee may be a “single director” company with the member as the single director. Alternatively, the trustee company may have a maximum of two directors (including the member). If the fund has only ONE member and the trustee is NOT a company there MUST be one other individual trustee. The other director or other individual trustee can be a relative OR any other person who is not an employer of the member.
Corporate Trustee Vs Individual Trustees
|Corporate Trustee||Individual Trustees|
|Cost||Set up cost and annual fee of $45 to ASIC||No set up and annual cost|
|Change of membership||Title on assets need not be changed when a new member joins or existing member leaves.||Title on all the assets would need to be changed whenever such a change happens which could be quite costly and time consuming affair specially in the case of real property titles.|
|Separation of assets||Super laws require that fund’s assets must be kept separate from members personal assets. With a separate identity of corporate trustee, there is a very reduced risk of members’ personal assets and SMSF assets getting intermingled.||There is a high risk of SMSF assets getting intermingled with personal assets and there could be inconsistencies with the separation of assets between the SMSF and its members.|
|Protection||As companies are subject to limited liability, a corporate trustee provides greater protection where someone sues trustee for damages.||Trustees personal assets might come into play. Like if a tenant in property owned by SMSF sues the trustees for damages.|
|Penalties||With the new administrative penalty regime in place since 1 July 2014, if there is a breach of super law, corporate trustee being separate entity would be liable for one penalty||In case of individual trustees, each trustee would be liable for any penalty imposed. Hence trustees might end up paying upto four times penalty as compared to corporate trustee.|
|Succession||A corporate trustee will continue in the event of a member’s death. With a corporate trustee, control of an SMSF and its assets is more certain in the event of the death or incapacity of a member.||A fund with individual trustees is not likely to continue to operate as usual when changes in trustees occur, unless an appropriate succession plan has been prepared.|
|Borrowing||If SMSF intends to borrow, most banks or financial institutions will insist on having a corporate trustee.||With individual trustees most banks or financial institutions will not lend or would lend lesser amounts due to high risk profile.
Cost of changing trustees at later stage could involve more cost and administrative hassle.
Who CANNOT be a member / trustee of a SMSF?
The Superannuation Industry (Supervision) Act 1993 provides that the following persons are DISQUALIFIED from acting as an individual trustee or a director of a corporate trustee:
- Persons who have prior convictions involving dishonest conduct, wherever or whenever such conviction may have occurred.
- Persons who are insolvent, bankrupt, or have entered into arrangements, assignments or compositions with creditors under Part X of the Bankruptcy Act 1966 (Cth) or a similar foreign law.
- Persons in relation to whom a civil penalty order has been made under theSuperannuation Industry (Supervision) Act 1993.
- Persons expressly declared not to be “fit and proper” persons under section 120A(3) of the Superannuation Industry (Supervision) Act 1993.
Steps in establishing a self managed superannuation fund
- There are a number of trust law and legislative requirements involved in establishing a self managed superannuation fund. Four major steps to establish a fund are:
- Establishing a trust – obtain a trust deed and make sure it contains all the relevant requirements.
- Electing to be a regulated fund, obtaining a tax file number and an Australian business number for the fund. The fund may also register for GST, if applicable.
- Prepare an investment strategy
- Open a bank account – a bank account is required to keep your superannuation fund assets separate from your personal assets and to manage your contributions, investments, earnings and expenses.
Trustee administrative obligations
- Trustees must sign a trustee declaration
- Keep records for 10 years
- Keep funds investments separate from personal investments
- Prepare and keep accurate accounting and administrative records
- The fund must continue to meet the definition of an “Australian superannuation fund”
- Lodge the fund income tax and regulatory return
- Appoint an auditor
SMSF reporting requirements
- Trustees must lodge an annual return with the ATO
- The return provides information in relation to:
- Income tax
- Member contributions
- Regulatory details
- SMSF must pay an annual levy of $259 (from 1 July 2013)
- The fund must be audited by an approved auditor
Key elements of an SMSF
Following are the key elements of an SMSF
- Trust deed – this is an important document setting out the governing rules of your SMSF.
- Investment strategy – this sets out in writing how you plan to invest your SMSF assets and you’ll need to stick to these guidelines to remain compliant.
- Death nomination – this document states who you would like your super benefits paid to in the event of death.
- Annual tax return and audit – every year you’ll need to have an accountant to prepare financial statements, lodge them with the ATO and organise an independent audit.