- What are SMSFs
- Trustees of the SMSF
- Payment of benefits
- Planning for the future
What are SMSFs
A SMSF is a superannuation fund with 4 or less members. Each member must be a trustee of the SMSF, or a director of a corporate trustee of the SMSF. The trustees of the SMSF are ultimately responsible for managing the SMSF.
SMSFs are unique superannuation funds as the members, in their capacity as trustees of the SMSF, have direct control over the investment and management decisions of the SMSF. As a result, with a SMSF you can truly take control of your own superannuation.
To qualify as a SMSF, no member can be an employee of another member, unless they are related and no trustee, or director of the corporate trustee, can be paid for their duties or services as a trustee, or director of the corporate trustee, of the SMSF.
In addition, for your SMSF to receive tax concessions, it must be an Australian superannuation fund. Generally your SMSF will meet the Australian residency requirements if it is established in Australia and all of the trustees reside in Australia. If any trustee or member of your SMSF is planning to live or stay overseas for an extended period, we suggest you seek professional advice immediately to determine if your SMSF will remain an Australian superannuation fund.
A SMSF must at all times be maintained solely for the purpose of providing benefits to the:
- SMSF members on or after their retirement;
- SMSF members after their attainment of the prescribed age of 65; or
- member’s dependants or legal personal representative on or after the death of a member.
Trustees of the SMSF
The trustees, or directors of a corporate trustee, are in charge of managing the SMSF and are ultimately responsible for the decisions of an SMSF.
Types of trustees
You can choose either of the following:
- a corporate trustee; or
- up to four individual trustees.
A corporate trustee is a company that acts as a trustee for the SMSF. Generally, all directors of the corporate trustee must be members of your SMSF and all members must be directors of the corporate trustee. If you already have a company, you may choose to use it as the corporate trustee. Otherwise Online Super Fund can incorporate a corporate trustee for your SMSF for a one-off fee of $600 (which includes the company registration fee of $495 payable to ASIC). A corporate trustee is beneficial in that members and directors can be removed and replaced without having to remove the company as trustee or change the trustee name that all of the investments of the SMSF are held under.
If you choose individual trustees, each individual will act as trustee and will be responsible for the decision making of the SMSF. You must have at least 2 individual trustees. Generally all individual trustees must be members of the SMSF and all members must be individual trustees. While it does not cost anything initially to elect individual trustees, it can potentially be more difficult, and more costly, in the future if the individual trustees change – as the SMSF trust deed will need to be varied and all of the investments of the SMSF will need to be transferred to the new trustee.
When making your decision, we recommend you consider the benefits and costs of each type of trustee structure for your specific circumstances.
Single member SMSFs
You can set up your SMSF with only one member.
If you have a corporate trustee for a single member SMSF, the member must be either:
- the sole director of the corporate trustee; or
- one of only two directors, that is either:
- related to the other director; or
- not an employee of the other director.
If you choose not to have a corporate trustee, your SMSF must have two individual trustees. One trustee must be the member and the other trustee must be a person who is either:
- related to the member; or
- not an employer of the member.
In most cases, all members of the SMSF must be trustees, so it’s important to make sure all members are eligible to be a trustee.
Generally, anyone who is 18 years of age or over and is not under a legal disability (such as bankruptcy or mental impairment) or a disqualified person can be a trustee of a SMSF.
A person is disqualified from acting as trustee if any of the following apply, they:
- have been convicted of an offence involving dishonesty;
- have been subject to a civil penalty order under the super laws;
- are considered insolvent under administration;
- are an undischarged bankrupt; or
- have been disqualified by a regulator (for example, by ATO or APRA).
A company cannot be a trustee if any of the following apply:
- the responsible officer of the company (such as a director, secretary or executive officer) is a disqualified person;
- a receiver, official manager or provisional liquidator has been appointed to the company; or
- action has commenced to wind up the company.
While members under 18 years of age cannot be a trustee of a SMSF, a parent or guardian of a minor who does not have a legal personal representative can act as a trustee on the minor’s behalf.
There are minimum standards for accepting contributions into your SMSF. You can find further information on contributions which a SMSF can accept on the ATO website here.
Contribution caps limit the amount that can be contributed for a member each financial year. The caps are indexed annually. A member whose total contributions in a year exceed the contribution caps may be liable for additional tax on the excess contributions. You can find further information on contributions which a SMSF can accept on the ATO website here.
The trustee must formulate and give effect to one or more investment strategies that have regard to the whole of the circumstances of the SMSF including:
- the risk involved in making, holding and realising, and the likely return from, the SMSF’s investments having regard to the SMSF’s objectives and expected cash flow requirements;
- the composition of the SMSF’s investments as a whole including the extent to which the investments are diverse or involve the SMSF being exposed to risks from inadequate diversification;
- the liquidity of the SMSF’s investments having regard to its expected cash flow requirements;
- the ability of the SMSF to discharge its existing and prospective liabilities; and
- whether the trustees of the SMSF should hold a contract of insurance that provides insurance cover for one or more members of the SMSF.
The trustee must review the investment strategies of the SMSF on a regular basis and may amend those strategies at any time. If an investment strategy is amended, the trustee must provide written notice of the amendments to all members.
Restrictions on investments
Superannuation law places certain restrictions on investments made by a trustee of a superannuation fund, including the following:
- Investments made by the SMSF must be made on an arm’s length terms;
- Acquisitions of assets from related parties of the SMSF (including members of the SMSF, their relatives and the companies they control) are prohibited except in limited circumstances;
- The SMSF must not lend the SMSF’s money, or give any other financial assistance using the resources of the SMSF, to a member or a relative of a member; and
- The borrowing of money is prohibited except in limited circumstances (including the borrowing of money to pay for an instalment warrant and certain limited recourse borrowing arrangements).
A failure to comply with the above restrictions can result in penalties and fines being imposed on the trustee of the SMSF. Accordingly, the trustee of the SMSF should obtain professional advice if there is any uncertainty over whether an investment complies with the applicable superannuation laws.
Payment of benefits
Generally your SMSF can only pay a member’s super benefits when the member reaches their ‘preservation age’ and meets one of the conditions of release, such as retirement. You can find further information on the preservation of superannuation and conditions of release on the ATO website here and here.
The payment may be an income stream (pension) or a lump sum, depending on the circumstances. You can find further information on paying benefits on the ATO website here.
Planning for the future
Setting up an SMSF is about more than just organising the paperwork to get started – it’s about planning for the future. We recommend you, and the SMSF’s members, seek professional financial advice before proceeding to setup a SMSF. It is also important to consider things such as death benefit nominations and insurance requirements.
Death benefit nominations
A death benefit is a payment made from a super fund on the death of a member. It’s usually paid to either:
- one or more of the member’s dependants (such as a spouse or child); or
- their estate.
In some cases, it may be paid to a non-dependant.
If the SMSF’s trust deed permits, a member can nominate who they want their death benefit paid to, by way of a death benefit nomination.
A death benefit nomination is a notice given to the trustees setting out who to pay the death benefit to and in what proportion. It is either:
- binding – it directs the trustees to pay the member’s death benefit to a legal personal representative or dependant; or
- non-binding – it notifies the trustees of the member’s preferred beneficiaries, leaving the trustees to make the final decision.
If your SMSF does not have a valid binding nomination for a member, their death benefit is paid according to the SMSF’s trust deed, with the trustees being guided, as appropriate, by any non-binding nomination.
You should also consider arranging insurance to protect your SMSF’s members (or their dependants) against death, injury, ill-health or income loss. Insurance premiums your SMSF pays may be tax deductible. We recommend you seek professional financial advice to help you with this decision.