SMSF setup - items to consider
If you have just read the previous page on how to establish a SMSF, you now have a process that can be followed to setup your new fund. However, those steps don’t paint the entire picture. We need to fill in a few gaps, as there are a few other items that you need to consider as you go through the process.
When establishing a self managed super fund, trustees will need to engage a SMSF supplier business in at least some way. Here are the options:
As the name suggests, these are providers that are found online whereby you purchase what is known as a ‘SMSF setup kit’. This will generally include a trust deed (either a PDF for you to print, or a hardcopy posted) along with the other paperwork required, and a step-by-step guide to establish a fund. This is generally the cheapest option, as you are the one getting it done.
This one is different to the above category in that they also do the annual administration of the fund, and as part of a package will do the SMSF setup (although sometimes they will do it as a stand alone service). Some do this for free if you place the end of year admin with them. The service level is mixed – some will assist you all the way through to completion, whilst others will give you a “SMSF setup kit” like in the category above, and leave you to it. If you go this route, ask what it is you are getting.
This is the category where a financial adviser or accounting professional is providing trustees with a personal service to get everything organised that is required to establish an SMSF. They may even be able to provide strategy advice if they are licensed to do so. This option is generally more expensive than the above two options, as you are paying for someone else with experience to get everything done for you.
The trust deed of a self managed super fund is the most important document, as it is effectively the governing rules of the fund, and as such it provides for what trustees are permitted to do in the fund (subject to the superannuation laws or course).
Now here’s the thing. Not all trust deeds are created equal.
The bottom line is that trustees will generally want a trust deed that is as broad as possible, in that it does not restrict them from implementing any strategies that the superannuation laws allow, or implementing any investment strategies that they may wish to pursue.
This dovetails with No.1 above, in terms of where the SMSF setup is completed. They will have a trust deed that they prefer. Don’t be afraid to ask them why they prefer this deed over others, when was the last time it was updated, and does it allow for all the latest SMSF strategies.
There are also a few specific “flags” that can be looked for. These are just some of the more common restrictions we have found in SMSF trust deeds over the years that you generally want to avoid:
Good SMSF trust deeds are those that have been written specifically for the needs and strategies applicable for self managed super funds, not other types of super funds.
Is the investment strategy of the fund going to be pooled or segregated ? Firstly, lets look at what this means. A pooled investment strategy is where the individual member accounts of the SMSF are pooled together and invested as if it is one sum of money. This is a very common approach, and is fine for a typical two member, husband and wife fund where the members are in the same stage of life and have a similar risk profile.
A segregated investment strategy is where the assets of one member of the fund are kept separate to another member of the fund. This is appropriate where the fund has members of different generations whereby the younger member may have a significantly different risk tolerance to older members, and hence separate strategies make sense. In this scenario, a good way to practically implement this is to have separate bank accounts for each member (or type of member), and to have other assets clearly assigned for the members (for example, a particular trading account may be used only for a particular member).
One of the major requirements of a SMSF is the need to have a written investment strategy, that sets out the objectives of the fund and the methods by which it will set about achieving them. Many SMSF setup kits will provide a basic template to use, although this may be somewhat inadequate if your investing is a bit more complicated.
Another document that may be required is called a Derivatives Risk Statement. Now, contrary to what many think, you don’t need this just because you trade derivatives. It is only required if you trade derivatives, specifically options or futures contracts, and they have a margin requirement to meet the obligations of an approved exchange. This would include covered calls, or futures contracts where other assets of the fund (such as shares) are held as collateral.