1. Choice of SMSF setup provider
In order to set up and maintain an SMSF, several services must be utilised to ensure the success of the fund. A breakdown of these services is as follows:
Accountant or Financial Adviser:
Each of these providers will generally provide you with a personalised service, and will supply and assist you with all the paperwork and registrations required to establish an SMSF. A number of these will also be able to assist you with strategies to use within the fund. This option will generally be more expensive than others.
SMSF Trust deed and setup pack supplier:
This supplier will provide you with a trust deed (either via email softcopy or post-bound hardcopy), and a setup pack. This pack includes all the paperwork required to establish the fund. Generally, they will also include a step-by-step guide for you to follow to complete the process (compared with the abovementioned accountant option). These are quite inexpensive, and can cost as little as $100.
SMSF Admin and setup provider:
These companies cater for both SMSF end of year administration, as well as setups. The market for these providers can vary greatly, as some will assist you from setup all the way through to completion, while others just provide you with a trust deed and a setup pack and leave you to it. The cost is generally somewhere between that of an accountant, and that of an SMSF trust deed and setup pack supplier.
2. The trust deed
Possibly the most important document associated with your SMSF, the trust deed provides the governing rules of the fund, and outlines what the trustees can and cannot do over the lifecycle of the fund. Unfortunately, not all trust deeds are the same, and there is quite a large variance in the marketplace in terms of the quality and usefulness of trust deeds.
A trust deed that would be considered “good” is one that is as un-restrictive as possible in regards to superannuation laws, and the strategies you want to employ. Unfortunately, a lot of SMSF trust deeds impose a lot of restrictions. This is due mostly to being just “cut & paste” jobs, where the majority of the deed has been taken from an old employer super fund trust deed, with sections added to make it an SMSF deed. Good SMSF deeds have generally been written from scratch with flexibility a central consideration. Another, more common reason, is that some deeds are not updated when the various superannuation laws change, which can happen several times a year. This can be particularly frustrating when a trustee may want to participate in a particular strategy that is possible because of a law change in recent past, but the trust deed does not allow it.
There are a number of signals in a trust deed that you can look at to get an idea of the restrictions it may impose, including:
- restricting members to only those people who are employees of the employer sponsor
- restricting investments to only certain asset classes
- restricting payouts to members only in the form of a pension. Not ideal if you require additional lump sum payouts
In order to obtain a suitable trust deed, the different suppliers outlined in section 1 should all be assessed in order to determine what kind of trust deed they use, how often it is updated, and whether or not it is capable of handling the latest SMSF strategies.
3. Written investment strategy
Superannuation laws require trustees to formulate a written investment strategy, and the regulator (The ATO) is very strict at governing it. Trustees must prepare and implement an investment strategy for the SMSF, which must reflect the purpose and circumstances of the fund. It should set out the investment objectives of the fund and detail the investment methods used by the trustees. All trustee investment decisions must be made in accordance with this investment strategy.
Most investment strategy templates are one or two pages, and very generic. This can be problematic, particularly for those who are using investment strategies that are a little more involved or advanced. It is advised that trustees seek a detailed, performance-specific investment strategy.
4. Pooled or separate investment strategies
When trustees set up a cash account for the fund, a pooled investment strategy (i.e. members’ funds are pooled together and invested) or segregated member investment strategies (i.e. segregated investments from each SMSF member) are used. If using separate member investment strategies, a separate cash or bank account for each member should be implemented. This will make the fund easier to manage, as members’ contributions can go directly into their own cash accounts.
A pooled strategy is fairly common between a husband and wife who are the only SMSF members, and have the same investment objectives and risk tolerances. A segregated strategy is useful where there are members of the fund who are intergenerational (i.e. parents and adult children) who have vastly different life expectancies, different investment objectives, and different risk tolerances, etc.
5. Derivatives Risk Statement
If your SMSF is going to trade derivatives (defined in SISA as options or futures contracts), where a derivatives contract requires a margin obligation for the trade to meet the requirements of the exchange for collateral, then the SMSF must prepare a Derivatives Risk Statement in accordance with the SIS Act (previously called a Risk Management Statement).
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