The SMSF Setup: A deep dive
If you are considering taking control of your superannuation, you may be asking: How do I set up an SMSF? How much does an SMSF cost? What are the requirements for establishing an SMSF? And is a self-managed super fund right for me?
Setting up a self-managed super fund (SMSF) can provide greater control over your retirement savings and investment decisions. However, an SMSF also comes with significant responsibilities. When you become an SMSF trustee, you take responsibility for ensuring the fund complies with Australia's superannuation and tax laws.
An SMSF is therefore much more than an investment account. It is a regulated superannuation structure requiring appropriate establishment documents, trustees, registration, an investment strategy, financial records, annual reporting and an independent SMSF audit.
This comprehensive guide explains how to set up an SMSF in Australia, the costs and responsibilities involved, common SMSF setup mistakes and what you should consider before becoming an SMSF trustee.
Looking for an SMSF auditor? Simply SMSF Audits provides independent SMSF audit services to help trustees, accountants and SMSF professionals meet their annual SMSF audit requirements.
What is an SMSF?
A self-managed super fund (SMSF) is a private superannuation fund that is established and managed for its members.
Unlike an industry or retail super fund, where professional trustees manage the fund on behalf of members, an SMSF gives its members much greater control over how their superannuation is managed and invested.
SMSF members are generally also trustees of the fund, or directors of a corporate trustee.
This means SMSF trustees are responsible for:
Managing the SMSF
Making investment decisions
Developing and reviewing the investment strategy
Keeping appropriate records
Ensuring SMSF investments comply with superannuation law
Reporting to the Australian Taxation Office (ATO)
Arranging the annual SMSF audit
Paying member benefits correctly
Maintaining appropriate ownership of SMSF assets
Ensuring the fund's money and assets are kept separate from personal assets
The ATO regulates SMSFs and has extensive powers where trustees fail to meet their obligations.
The benefit of an SMSF is control. The trade-off is responsibility.
Should You Set Up an SMSF?
Before asking how to set up an SMSF, you should first ask whether an SMSF is appropriate for your circumstances.
An SMSF is not automatically better than an industry or retail super fund.
The right decision can depend on:
Your superannuation balance
Your investment objectives
Your investment experience
The types of assets you want to invest in
Your retirement goals
The costs of running an SMSF
Your willingness to undertake trustee responsibilities
Whether you require specific investment flexibility
Whether you want to invest directly in property
Whether you need an SMSF for a particular business or investment strategy
An SMSF may be particularly attractive to people who want greater control over their investment portfolio or who want access to investments that may not be available through traditional superannuation funds.
However, greater investment choice does not necessarily mean greater investment returns.
You should consider the costs, risks and responsibilities of running an SMSF before establishing one.
How to Set Up an SMSF
The SMSF setup process involves several important steps.
While the precise process can vary depending on the fund structure and individual circumstances, establishing an SMSF will generally involve:
Deciding whether an SMSF is appropriate
Choosing the members
Choosing the trustee structure
Establishing the SMSF trust
Preparing the SMSF trust deed
Establishing a corporate trustee if required
Registering the SMSF with the ATO
Obtaining an ABN and TFN
Opening an SMSF bank account
Preparing an investment strategy
Transferring or contributing superannuation
Purchasing investments
Maintaining appropriate records
Arranging the annual SMSF audit
Lodging the SMSF annual return
Each of these steps needs to be completed correctly.
1. Decide Who Will Be the SMSF Members
An SMSF can have up to six members.
The members are the people whose superannuation is held by the fund.
Many SMSFs are established by:
Individuals
Couples
Family members
Business owners
The membership structure should be considered carefully before establishing the fund because adding or removing members can create additional administrative and legal requirements.
You should also consider whether all proposed members have compatible investment objectives and whether they understand the responsibilities involved in managing an SMSF.
2. Choose an SMSF Trustee Structure
One of the most important decisions when establishing an SMSF is deciding who will act as trustee.
There are two primary structures:
Individual trustees
Individuals can act as the trustees of the SMSF.
For example:
John Smith and Jane Smith as trustees for the Smith Family Super Fund.
The members of the SMSF are generally also its trustees.
Individual trustees can have lower initial establishment costs, but changes to the fund's membership can require changes to the trustee arrangements.
Corporate trustee
Alternatively, a company can act as trustee of the SMSF.
For example:
Smith Super Pty Ltd as trustee for the Smith Family Super Fund.
The SMSF members are generally directors of the corporate trustee.
A corporate trustee can provide advantages in terms of administration, succession and changes in membership.
It can also make it easier to distinguish SMSF assets from personal assets because the assets are held in the name of the corporate trustee.
The choice between individual trustees and a corporate trustee should be considered before establishing the SMSF.
3. Establish the SMSF Trust
An SMSF operates through a trust structure.
The fund needs an appropriate SMSF trust deed setting out the rules governing the fund.
The trust deed is an important legal document and should be appropriately prepared for a superannuation fund.
It can address matters including:
Trustee powers
Appointment and removal of trustees
Membership
Contributions
Investments
Payment of benefits
Death benefits
Pensions
Trustee decision-making
Administrative procedures
The trust deed must operate consistently with superannuation legislation.
It is therefore important that SMSF establishment documents are prepared correctly.
4. Establish a Corporate Trustee if Required
If you decide to use a corporate trustee, a company will need to be established to act as trustee of the SMSF.
The company will generally need to be registered with ASIC.
The company should be established specifically with the SMSF structure in mind.
Using a corporate trustee can involve additional establishment and ongoing costs, but it may provide significant administrative and succession advantages over the life of the SMSF.
This is particularly relevant where the fund may eventually have substantial assets, property or multiple members.
5. Register Your SMSF
Once the SMSF has been established, it generally needs to be registered with the ATO.
The SMSF will generally need:
An Australian Business Number (ABN)
A Tax File Number (TFN)
Appropriate registration as a regulated superannuation fund
Trustee details
Member details
The registration process is important because an SMSF must meet the relevant requirements to receive the intended tax treatment available to complying superannuation funds.
6. Open an SMSF Bank Account
An SMSF should have a dedicated bank account.
The account should be held in the name of the trustee in its capacity as trustee for the SMSF.
For example:
Smith Super Pty Ltd as trustee for Smith Family Super Fund
The SMSF bank account should be kept completely separate from the personal bank accounts of members and trustees.
This is one of the most important practical rules for SMSF administration.
SMSF money belongs to the fund.
It should not be treated as personal money that members can access whenever they wish.
All contributions, investment income, expenses and other transactions should be properly recorded as transactions of the SMSF.
7. Prepare an SMSF Investment Strategy
Every SMSF needs an investment strategy.
The investment strategy is one of the most important documents maintained by an SMSF trustee.
It should consider matters including:
Investment objectives
Risk
Diversification
Liquidity
Investment returns
The fund's ability to pay member benefits
The circumstances of the members
Insurance considerations where appropriate
The investment strategy should reflect the SMSF's actual investments.
For example, if an SMSF has invested a substantial proportion of its assets in a single property, the trustees should be able to demonstrate that they have considered the risks and implications of that investment.
An investment strategy should not simply be a generic document prepared when the SMSF is established and then forgotten.
Trustees should review their investment strategy regularly and when there are significant changes to the fund.
8. Transfer Your Existing Superannuation
After establishing an SMSF, members may decide to roll over existing superannuation from another fund.
This needs to be done correctly.
Before transferring superannuation, consider whether leaving your existing fund could result in the loss of:
Insurance cover
Particular investment options
Fund-specific benefits
Other features or services
A rollover should also be properly documented and recorded in the SMSF's accounting records.
Large or complex rollovers should be carefully reviewed to ensure they are correctly processed and allocated to the relevant member.
9. Make Contributions to Your SMSF
SMSF members can generally receive eligible superannuation contributions.
These may include:
Employer contributions
Salary sacrifice contributions
Personal concessional contributions
Personal non-concessional contributions
Other permitted contribution types
Superannuation contribution rules can be complex.
Contribution caps, eligibility requirements and other conditions can apply.
Incorrectly making or recording contributions can create tax and compliance issues.
For this reason, significant contributions should be considered carefully before they are made.
10. Choose Your SMSF Investments
One of the biggest reasons people establish an SMSF is investment flexibility.
Depending on the circumstances, SMSFs can invest in a broad range of assets, including:
Australian shares
International shares
ETFs
Managed funds
Term deposits
Cash
Property
Business real property
Other permitted investments
However, SMSF trustees cannot simply invest in anything they want.
SMSF investments must comply with superannuation legislation and the fund's governing rules.
Trustees also need to consider restrictions involving related parties.
An investment that makes commercial sense may still be prohibited under superannuation law.
SMSF Property Investment
Property is one of the most searched-for reasons for establishing an SMSF.
An SMSF can potentially invest in property, but strict rules apply.
Residential property generally cannot be acquired from a related party and cannot generally be lived in or rented by fund members or their related parties.
Business real property can be treated differently in certain circumstances.
Trustees must also ensure that the investment satisfies the relevant superannuation requirements.
If the SMSF wants to borrow money to acquire property, additional rules apply.
This is generally structured using a Limited Recourse Borrowing Arrangement (LRBA).
SMSF property and SMSF borrowing can be complex, particularly where the arrangement involves:
Property trusts
Related parties
Commercial property
Business premises
Loans
Lenders
Bare trusts
Refinancing
Property development
Professional legal, financial and tax advice should be considered before entering into an SMSF property transaction.
The SMSF Sole Purpose Test
The sole purpose test is a fundamental requirement for SMSFs.
Broadly, an SMSF must be maintained for the purpose of providing retirement benefits to members, or other benefits permitted under superannuation legislation.
This means members cannot use their SMSF as a personal investment vehicle.
For example, an SMSF cannot generally purchase a holiday property so that the members can use it personally.
Similarly, trustees cannot simply withdraw SMSF money whenever they want.
SMSF assets must be used and managed in accordance with superannuation law.
Keep SMSF Assets Separate
SMSF trustees must ensure that the fund's assets are clearly identifiable as SMSF assets.
This means investments should be held in the correct trustee capacity.
For example:
ABC Pty Ltd as trustee for ABC Super Fund
rather than simply:
John Smith
Keeping assets separate helps demonstrate that the assets belong to the SMSF rather than the individual members.
It is particularly important when an SMSF owns:
Property
Shares
Managed investments
Business assets
Term deposits
Other substantial investments
Incorrect asset ownership can create significant problems during an SMSF audit and may require expensive corrective action.
SMSF Record Keeping
Good record keeping is essential to running an SMSF.
Trustees should retain appropriate documentation supporting the fund's transactions and decisions.
Records may include:
Bank statements
Investment statements
Contribution records
Rollover documentation
Purchase contracts
Sale contracts
Property documents
Valuations
Trustee minutes
Investment strategy
Pension documentation
Loan agreements
Insurance documents
Tax records
Audit reports
Good records make it easier for your accountant, administrator and SMSF auditor to complete their work.
More importantly, records demonstrate that trustees have properly considered and made decisions relating to the fund.
How Much Does It Cost to Set Up an SMSF?
One of the most common questions prospective trustees ask is:
How much does an SMSF cost?
There is no single fixed SMSF setup cost.
The cost will depend on the structure and professional services required.
Potential establishment costs include:
SMSF trust deed
Corporate trustee establishment
ASIC registration
Professional advice
Legal advice
SMSF registration
Bank account setup
Investment platform setup
There are also ongoing SMSF costs.
These may include:
SMSF accounting
SMSF administration
Annual SMSF audit
Tax return preparation
Financial advice
Legal advice
Investment fees
Brokerage
Bank fees
Property management
Valuation fees
Corporate trustee costs
The more complex the SMSF, the more administration may be required.
An SMSF holding a simple portfolio of listed shares can be considerably less complicated to administer than an SMSF holding property, an LRBA, private investments and pension accounts.
When assessing whether an SMSF is appropriate, consider the total ongoing cost, rather than simply the initial setup cost.
The SMSF Annual Audit
One of the most important ongoing SMSF obligations is the annual audit.
Every SMSF must generally have an annual audit conducted by an appropriately registered SMSF auditor.
The SMSF auditor independently examines the fund's financial statements and compliance with relevant superannuation legislation.
The audit can consider matters such as:
Contributions
Benefit payments
Investments
Related-party transactions
Asset ownership
Investment strategy
Borrowing arrangements
Trustee compliance
Fund records
Other regulatory requirements
An SMSF audit is therefore much more than checking whether the accounting figures add up.
The audit provides an independent assessment of whether the fund has complied with relevant requirements.
At Simply SMSF Audits, our focus is specifically on SMSF audit services, helping accountants, advisers and SMSF trustees obtain an independent audit of their fund.
Who Is Responsible for the SMSF?
This is an important point for every SMSF trustee to understand.
The trustee is ultimately responsible for the SMSF.
An accountant, administrator, financial adviser or SMSF auditor can provide professional services, but engaging professionals does not transfer the trustee's legal responsibilities to those professionals.
Trustees need to understand their obligations and ensure the fund is properly managed.
This is why choosing experienced professional advisers is so important.
Common SMSF Setup Mistakes
Establishing an SMSF incorrectly can create problems that may continue for years.
Some common mistakes include:
Choosing the wrong trustee structure
Changing the trustee structure later can involve additional costs and administration.
Failing to properly establish the fund
The trust deed and establishment documentation need to be appropriate for the SMSF.
Mixing personal and SMSF money
SMSF bank accounts and assets must be kept separate from members' personal finances.
Purchasing prohibited investments
SMSF investment rules contain restrictions that trustees need to understand.
Failing to document decisions
Important trustee and investment decisions should be appropriately documented.
Ignoring related-party rules
Transactions involving members and related parties require particular care.
Using SMSF property personally
SMSF property cannot generally be used by members for personal purposes.
Failing to maintain an appropriate investment strategy
The investment strategy needs to reflect the actual circumstances and investments of the SMSF.
Forgetting about the annual audit
Every SMSF generally requires an annual independent audit.
Assuming your accountant is responsible for everything
Professional advisers can assist, but trustees remain responsible for the SMSF.
SMSF Compliance: What Happens After Setup?
Setting up an SMSF is only the beginning.
An SMSF requires ongoing administration and compliance throughout its life.
Trustees need to ensure:
Contributions are correctly recorded
Investments remain compliant
The investment strategy is reviewed
Fund assets are properly held
Records are maintained
Member benefits are paid correctly
Tax obligations are met
The annual SMSF audit is completed
The SMSF annual return is lodged
Trustee and corporate trustee obligations are maintained
This ongoing work is why it is important to understand the responsibilities involved before establishing an SMSF.
SMSF Death Benefits and Estate Planning
SMSF trustees should also consider what happens to a member's superannuation when they die.
Depending on the circumstances, this can involve:
Binding death benefit nominations
Reversionary pensions
Trustee succession
Estate planning
Wills
Corporate trustee control
Payment of death benefits
These issues can become particularly important where an SMSF has substantial assets or property.
Succession planning should therefore be considered when establishing an SMSF rather than being left until later.
SMSF Setup Checklist
Before establishing your SMSF, consider the following checklist:
☐ Determine whether an SMSF is appropriate
☐ Identify the proposed members
☐ Choose individual or corporate trustees
☐ Establish the SMSF trust
☐ Prepare the SMSF trust deed
☐ Establish the corporate trustee if required
☐ Register the SMSF with the ATO
☐ Obtain an ABN and TFN
☐ Open a dedicated SMSF bank account
☐ Prepare an investment strategy
☐ Consider insurance requirements
☐ Transfer eligible superannuation
☐ Establish contribution arrangements
☐ Purchase appropriate investments
☐ Keep SMSF assets separate
☐ Maintain accurate records
☐ Arrange the annual SMSF audit
☐ Lodge the SMSF annual return
☐ Review the fund's investment strategy regularly
☐ Consider succession and death benefit arrangements
Frequently Asked Questions About Setting Up an SMSF
How do I set up an SMSF?
Setting up an SMSF generally involves establishing the trust, choosing trustees, preparing the trust deed, registering the fund with the ATO, opening a dedicated bank account, preparing an investment strategy and transferring or contributing superannuation.
How much money do I need to start an SMSF?
There is no single legislated minimum SMSF balance that automatically determines whether someone can establish an SMSF. However, prospective trustees should consider whether the benefits of an SMSF justify its establishment and ongoing costs.
How long does it take to set up an SMSF?
The time required depends on the trustee structure, documentation, registration and other circumstances. A straightforward SMSF can generally be established relatively quickly once all required information and documentation are available.
Can I use my SMSF to buy property?
Potentially, yes. SMSFs can invest in certain types of property, subject to strict superannuation rules. Residential property and business real property are subject to different requirements, and borrowing to purchase property involves additional rules.
Can I live in a property owned by my SMSF?
Generally, no. SMSF residential property cannot generally be used or occupied by members or their related parties.
Does an SMSF need an annual audit?
Yes. SMSFs generally require an annual independent audit by an appropriately registered SMSF auditor.
Do I need an accountant to run an SMSF?
You are not necessarily required to use an accountant for every aspect of running an SMSF. However, SMSF administration can be complex, and many trustees engage accountants, administrators, financial advisers and other professionals to assist with their responsibilities.
Who audits an SMSF?
An SMSF must be audited by an appropriately registered SMSF auditor who is independent of the fund's accounting and administration functions to the extent required by the applicable rules.
What happens if my SMSF breaches the rules?
SMSF breaches can have serious consequences. Depending on the nature and severity of the breach, the ATO may impose administrative penalties, issue directions, require corrective action or take other regulatory action.
Is Setting Up an SMSF Worth It?
For the right person, an SMSF can provide considerable control and flexibility over retirement savings.
However, an SMSF also creates significant responsibilities.
The decision should not be based solely on the desire to invest in property, reduce tax or take control of superannuation.
Instead, consider the complete picture:
Investment control + flexibility + costs + compliance responsibilities + administration + risk.
An SMSF can be particularly useful where the structure provides meaningful benefits that justify the additional administration and responsibility.
For other investors, an industry or retail superannuation fund may provide a simpler and more cost-effective solution.
Choose Simply SMSF Audits for Your SMSF Audit
Setting up an SMSF correctly is important. Maintaining compliance throughout the life of the fund is equally important.
Once your SMSF is established, one of the fund's key ongoing obligations is its annual independent audit.
Simply SMSF Audits specialises in SMSF audits, providing independent audit services for SMSF trustees, accountants and advisers.
Our focus is simple: SMSF audits.
Whether your SMSF invests in shares, managed investments, property or more complex assets, having an experienced SMSF auditor can help ensure the fund's annual audit is completed independently and professionally.
If you are an accountant or SMSF professional looking for an independent SMSF auditor, or an SMSF trustee wanting to understand your audit requirements, contact Simply SMSF Audits to discuss your requirements.
Final Takeaway
Setting up an SMSF can provide greater control over your superannuation, but it comes with substantial responsibilities.
From choosing the right trustee structure and establishing the trust through to developing an investment strategy, managing investments, maintaining records and completing the annual SMSF audit, every stage of the SMSF lifecycle needs to be handled carefully.
The most important thing to remember is that establishing an SMSF is not the end of the process — it is the beginning of your responsibilities as an SMSF trustee.
Before establishing an SMSF, consider obtaining appropriate financial, legal and tax advice based on your individual circumstances.
And once your SMSF is established, make sure its annual audit is handled by an appropriately registered and independent SMSF auditor.
Simply SMSF Audits — independent SMSF audit services for SMSF trustees, accountants and advisers.
Disclaimer: This article is provided for general information purposes only and does not constitute financial, legal, taxation or personal advice. Superannuation and taxation laws can change. You should obtain professional advice relevant to your circumstances before establishing or making significant changes to an SMSF.