Setting up an SMSF

/Setting up an SMSF
Setting up an SMSF2019-01-22T06:53:43+00:00

Setting up an SMSF

Setting up an SMSF

Startup and Ongoing Costs

Setting up an SMSF is relatively easy; the hard part is deciding who you will get to do it. Just like any other commercial transaction the principle of ‘let the buyer beware’ applies to setting up an SMSF. The unwary can find themselves paying many thousands of dollars in so-called advice and setup fees, when the whole process should cost well under $1,000.

Being aware of costs extends to the annual cost of administration. There are several layers to this ongoing yearly cost. These are the:

  • annual fee payable to the ATO,
  • administration fees where a less hands on approach is taken,
  • accounting cost for the annual statements required by the regulations, and
  • cost of auditing the fund each year.

The annual fee charged by the ATO for the 2013 year was $200 but will increase to $259 from 1 July 2013. The cost of administration, accounting and audit differ greatly depending on how much work the trustees are able to do themselves and who is providing the service.

There are a number of different ways that this second group of costs can be charged for. In some cases this is charged as a percentage of the total value of the fund, which can be very expensive for a fund with large member balances, or it can be done on a fee-for-service basis.

There are some providers of SMSF services that provide an all encompassing service that includes the set up and administration service. For these providers the cost of administration is reduced if the trustees get investment advice and purchase investments through the service provider.

When I started doing the accounting and tax returns for SMSFs more than 30 years ago the accounting fees were between $500 and $900. This depended on the number of members and investments a fund had and how well the trustees kept the books.

As a direct result of the increased scrutiny of SMSFs, and the tightening of regulations and the duties of trustees, an annual cost charged by fee for service professional for doing the accounts now starts at around $1,500 for a very simple fund including the cost of the audit.

This fee can increase to well over $3,000 depending on the number of share and/or property investments, and whether the fund has members in both accumulation and pension phase.

There are some service providers to SMSFs that have charges that are lower for the complete service, but this can often come at the cost of reduced choice by having to use their bank account and or online share service. There are yet other service providers that charge what they think the client can afford.

In the end it is up to the trustees to be comfortable with who they use. For some people the no-frills and no-advice service of the cheap providers suits them. Others who want to have their hand held, lots of advice and a high level of service are happy to pay the higher fees.

The best advice I can give is, work out what services you will need first, then compare the services offered and costs for a number of different providers before choosing who you use.

Setting Up The Fund

The process of setting up an SMSF is highly formalised due to the legal and taxation requirements. This means each step of the process must be done in order. The 11 steps are as follows:

  1. Decide on a name for the SMSF and who will be the members.
  2. Decide on whether you will have the members act as trustees or form a company to become the trustee for the fund.
  3. Have the trust deed drawn up.
  4. Elect to be a regulated SMSF.
  5. Apply for a TFN and ABN for the fund, and register for GST if applicable.
  6. Open a bank account (or a number of accounts) for the trust.
  7. Sign trustee declarations.
  8. Decide on an investment strategy.
  9. Put in place administration and accounting systems.
  10. Receive contributions and rollovers.
  11. Invest monies received.

Decide on a Name, Trustees and Members for the Fund

Sometimes deciding on the name of an SMSF can be easy. For many people they just use their surname, and come up with something like the Smith Family Super Fund.

Others like to go for something more creative and have a name that means something to them, such as the Kicking Back and Drinking More Retirement Fund. Some care does need to be taken as the name chosen will have to appear on bank accounts and as the owner of investments.

When it comes to deciding on who will be trustees there is only a choice between the members and a company with all of the members being directors. As having a company act as trustee adds another level of cost to the setup of the SMSF many people choose to be individual trustees, this can prove to be a false economy.

The extra cost of having a company act as trustee is initially about $800. There is also an annual lodgement fee of $42 a year as long as the company only acts as a trustee for the SMSF.

Having a company act as trustee can be an advantage for the following reasons:

  • When there is only one member. If a company is not used another person must be found to be a trustee. This means whenever super fund documentation needs to be signed the other non-active member must be available.
  • Having a company act as trustee makes it easier to differentiate between personally held investments and superannuation investments. In addition having a company with a short name makes it easier when filling out applications and other documentation when buying investments.
  • For a husband and wife fund when one of them dies very little work is required.

Where individuals act as trustees, and one of them dies, the remaining member has a choice of the following:

  • Wind up the fund and payout all of the benefits or roll them into an industry or commercial super fund.
  • Choose to become a small APRA fund and pay for a trustee company to take over as trustee.
  • Find another person to become a trustee to replace the deceased. This will mean the new trustee must be available to sign all administration and investment documentation.
  • Appoint a company to take over as trustee.

Where a decision is made to retain the fund by appointing either a new individual trustee or a company the work does not stop there. After the new trustee has been appointed the name that all of the investments are held in must be changed.

In the final analysis incurring the extra cost of having a company act as trustee when the SMSF is set up can save a lot of work and cost in years to come. After the death of a member, when the surviving member is grieving and doesn’t want to be troubled with SMSF admin issues, no action relating to the trustee needs to be taken.

Have the Trust Deed Drawn Up

Every SMSF must have a trust deed. As this is a legal document it must be drawn up by a solicitor. As most people setting up an SMSF do this through their accountant or financial adviser they don’t realise the different options for having a deed drawn up. They also often do not have a basis for judging whether they are getting a good deal or being ripped off.

In addition to using a lawyer to draw up a super fund trust deed, there are many companies that provide services to the SMSF industry. Some are specialist companies that not only set up super funds but offer ongoing administration services. There are others that, as well as setting up companies and discretionary trusts, also provide trust deeds for super funds.

These companies have solicitors draw up a standard deed they use for the super funds they set up. The standard deed then has the relevant information inserted, such as the fund’s name and the names of the members and trustees. In fact in truth many legal firms work the same way. They have a standard super fund deed that they drop the relevant information into.

Deeds from companies that specialise in SMSF and company formation usually cost between $400 and $500. Deeds prepared by legal firms will often cost more than this. Unless you have special needs or a complicated structure that requires extra legal advice, the added cost of having a solicitor draw up a one-off deed is not really warranted.

Where you are using an accountant or financial adviser to assist you, the extra cost for these services, depending on how many meetings are required and how complicated your financial situation is, should be approximately $250. For this the adviser should also register the fund for income tax and look after the other registrations required.

In most cases it is not necessary for trustees and members of an SMSF to have an intimate knowledge of their super fund’s deed. This is because they are not setting up the deed themselves but using a professional who should know what he or she is doing. Trustees should however read the deed to become familiar with its layout and its different sections.

One question that should be asked of whoever you are using is how recent the deed is. Over the past five years there have been many changes to superannuation. Not only have we had the new, better, somewhat simpler superannuation system that applied since 1 July 2007, there has also been transition to retirement pensions, the ability to borrow, and splitting super with a spouse.

At the very least the deed you get must have all of these new rules and benefits in it. Often modern super fund deeds have a catch-all clause which basically states that anything allowed by the relevant pieces of legislation will be allowed within the fund.

The deeds are often split into sections that deal with the following:

  • Who can be members and contributing employers.
  • What sort of contributions can be made.
  • How benefits are calculated.
  • How benefits can be taken by members.
  • What investments are allowed by the fund.
  • What the duties and responsibilities of the trustees are.
  • What records and accounting systems must be in place.
  • How the super fund is to be wound up.
  • How trustees are appointed and removed.
  • How decisions are to be made by the trustees.

This is by no means an exhaustive list of the items that should be in a trust deed. The important thing is to make sure the provider of the deed warrants that it is up to date and takes account of all recent legislative changes.

If you have a super fund that was set up many years ago that will not be a problem. Most of the service providers offer a trust deed updating service. To update your deed should cost approximately $200, and up to $500 for a replacement deed.

From Becoming a Regulated SMSF to Signing Trustee Decs

Within 60 days of an SMSF being established it must lodge the appropriate form with the ATO electing to be a regulated superannuation fund. By lodging the election the SMSF also acknowledges that it will comply with the requirements of the SIS Act. If this form is not lodged the fund will be classed as non-complying and therefore will not receive the concessional tax treatment.

This election form is often prepared by the professional used to set up the SMSF. This form ends up being just one of a mountain of forms and documents that must be signed when setting up an SMSF.

The form to be completed is called an ‘Application to Register for the New Tax System Superannuation Entity’. For trustees that want to really do everything themselves, and save accounting costs, the form can be lodged online at, or a paper version is available by phoning the small business information line on 13 28 66, or go to the ATO website at

Complete Tax and ABN Registrations

Applying for a tax file number and ABN and registering the fund for GST are all done through the form ‘Application to Register for the New Tax System Superannuation Entity’. The form has 11 different sections that, if not applicable such as registering for GST, do not need to be completed.

In most cases SMSFs do not register for GST as any small benefit they would get, such as claiming GST paid on some professional fees, is far outweighed by the extra work required by trustees in completing the BAS forms. Where an SMSF owns a commercial property it will more than likely be required to register for GST due to the level of income produced.

Open Bank Account/s

An SMSF must have a bank account as soon as possible to receive contributions. The account can be a cheque account or even a savings account. The type of account favoured by many super funds is a cash management account (CMA).

These accounts are very flexible and pay a reasonable rate of interest on funds held in the account. They also often come with a cheque book and allow you through internet access to set up regular payments, such as when a fund is in pension phase. Paying a pension regularly through this facility decreases administration and also ensures minimum pensions are taken.

There are some things that a CMA will not do that a traditional cheque account allows. One of these is the depositing of cash into a CMA. Where you have cash, and can’t deposit it direct into the CMA, this should be deposited into a private account then transferred into the CMA.

In most cases a CMA provides an SMSF with all the flexibility it needs and also pays a respectable interest rate on funds held. There are some CMAs that pay a better interest than others, by approximately 0.3%, because they allow advisers to rebate the trailing commission built into the account.

As a part of setting up a bank account for the SMSF it also makes sense to set up regular deposits of contributions from an employer’s account or your own private or business account. For trustee/members of a fund who run their own business, and they do not have a regular periodic payment for the contributions, they can inadvertently breach the SGC requirements as employees by making irregular lump sum payments.

Under the SGC requirements super contributions must be made on a quarterly basis even for owner employees. By not meeting these deadlines owners run the risk of having their SGC contribution made non-tax-deductible and incurring administrative costs.

Sign Trustee Declarations

Within 21 days of the SMSF being set up the trustees must sign the ATO’s trustee declaration. The declaration requires the trustees, or the directors of the trustee company, to state that they understand that they are responsible for ensuring that the fund complies with the SIS Act and other relevant legislation.

After listing all of the penalties that the Commissioner of Taxation can impose when the legislation is not complied with, the declaration provides details of the sole purpose test, trustees’ duties, investment restrictions, accepting contributions and paying benefits, and the administration duties including recordkeeping.

Decide on Investment Strategy for the Fund

As trustees of an SMSF must have an investment strategy, it should be formulated before any money is received. Developing the strategy properly will help avoid too much of the SMSF’s assets being held in cash accounts.

Many in the financial planning industry have criticised SMSFs due to the trustees not managing their investments properly. The evidence offered to support this is often the higher than usual levels held by SMSFs in cash accounts such as CMAs and bank accounts.

This in some cases is a valid criticism as some trustees do not give enough thought to how they are going to invest the funds in their SMSF.

In the end the trustees of an SMSF are forced to have an investment strategy by Section 52 (2) (f) and Regulation 4.09 of the SIS Act. This section deals with the covenants that must be in the governing rules of an SMSF trust deed. The section requires the trustees:

‘(f) to formulate and give effect to an investment strategy that has regard to the whole of the circumstances of the entity including, but not limited to, the following:

(i) the risk involved in making, holding and realising, and the likely return from, the entity’s investments having regard to its objectives and its expected cash flow requirements;

(ii) the composition of the entity’s investments as a whole including the extent to which the investments are diverse or involve the entity in being exposed to risks from inadequate diversification;

(iii) the liquidity of the entity’s investments having regard to its expected cash flow requirements;

(iv) the ability of the entity to discharge its existing and prospective liabilities;’

In simpler terms the investment strategy for the SMSF should take account of:

  • the risks associated with each type of investment, what the expected investment return will be in relation to the risk, and what the expected cash flow will be from the different types of investments
  • the need to diversify the SMSF’s assets over the different investment classes and also diversify within each class
  • how easy it will be to convert investments to cash should the fund need to pay out benefits or pay administration costs
  • the future payments required to be made, such as members that are close to retirement age.

The investment strategy is not the sort of document that is written out and then put in a bottom drawer and forgotten. It is a document that must be reviewed at least annually to take account of each different stage the SMSF is in and changes in investment markets.

In the end it is up to the trustees to decide what they want to invest in. If that happens to be almost 100% in property, for example, they would need to make sure their investment strategy takes account of the four components listed in Section 52 (2) (f).

Put in Place Administration and Accounting Systems

As early as possible the trustees of the SMSF should decide how much work they want to do in administering their fund, and what work they want performed by service providers.

Where trustees want to do most of the work themselves they need to decide how they will keep track of the SMSF’s deposits and payments.

This could be a sophisticated computer package or a simple cash book. If not enough thought is given to this they may end up with what accountants call the ‘shoe box method’ of accounting. This method increases the chances of trustees breaching the regulations and typically results in a higher accounting fee.

Receive Contributions and Rollovers

The first contribution received by a new SMSF is usually a non-concessional contribution from the members to start the bank account, or it can be an amount rolled over from the super fund the members were in previously.

After these initial contributions the regular concessional contributions should be received from employers or members, and either regular or occasional non-concessional contributions from members.

The first step in arranging a rollover of superannuation held by an old fund is to contact the super fund’s member enquiry line. Different funds have different procedures and forms that must be completed before allowing a rollover. In most cases super funds will require a copy of the notice or letter from the ATO stating that the SMSF is a regulated fund.

As a part of completing the documentation, which will hopefully be the new standard “Request to Transfer” form available from the ATO, you will need to provide copies of documents that prove your identity to the super fund that you want to roll out of.

Where members of an SMSF have their previous super in an industry fund, they may find that they cannot have their employer contribution go to their SMSF. This is because, despite every Australian supposedly being able to choose their superannuation fund, there are some industrial agreements that force employers to contribute to an industry fund.

In this situation, and if the members of the SMSF want to maximise the money invested through their fund, the industry fund can be asked to roll over most of the member’s balance held by them.

But be warned. Not all industry or commercial funds are the same. Some will place as many road blocks as they can in the way of the funds being transferred away from their control. If this happens, you can lodge a complaint with APRA as, under the SIS Act, a super fund must transfer the funds within 30 days of having all of the required information and evidence.

Invest Monies

The last step in the process of setting up an SMSF is to purchase the investments for the fund. This investing must be done in accordance with the investment strategy agreed by the trustees. It also should not breach any of the investment regulations detailed in the member’s only section.