All Superannuation Funds are designed to provide retirement benefits to the members of that Fund, and must operate in accordance with the Superannuation Industry Supervision Act.

The difference between a Self Managed Superannuation Fund (SMSF) and other types of superannuation funds is that the members of a SMSF are also the trustees (or the directors of a corporate trustee) for the fund. The maximum number of members that you can have in a SMSF is four.

The SMSF is established under a trust deed, which is known as the funds Governing Rules, which outlines what the Trust can and can’t do. It also outlines the duties and responsibilities of the trustees and members of the fund.

You generally need to have a significant amount of superannuation, or be looking to build up your super quite quickly, to warrant starting a SMSF.

Everyone has a different view of ‘how much’ money is enough to start a SMSF – we would suggest that a minimum of $150,000 is needed and on top of this you should be looking to build up your super with significant contributions.

If you are closer to retirement and looking more at what super you have already, then the figure should be close to or over $250,000.

To establish a SMSF costs are incurred for the preparation of the governing rules, various registers and minutes, as well as registration of the Trustee and SMSF with the Regulator. The cost for these services range from $500 to $2,000 depending on the circumstances.

The Trustees of the SMSFs have the legal responsibility to ensure the SMSF operates at all times within the requirements of superannuation law. A written acknowledgment that trustees are aware of their role and responsibilities is also required by the ATO.

As the law governing superannuation is complex and constantly changing most Trustees engage professionals to assist them with the various duties under the law.

Financial planning professionals assist in areas such as asset allocation, investment selection and performance monitoring. Assistance will also be required to address the issue of insured benefits in the SMSF and the questions on timing and form of benefits to be paid to members.

Others act as professional administrators such as Multiport to ensure the relevant paperwork and record keeping is prepared. This would include preparation of financial accounts and reporting to the Government regulator.

The Government has provided superannuation with a variety of tax incentives on the basis that SMSFs follow the law as specified. If a SMSF does not follow the law then penalties can be imposed by the Government regulator on the Trustee and in certain circumstances the member’s entitlements.

These penalties include fines payable by the Trustee (not from the SMSF’s assets) ranging from amounts of $550 to $11,000, imprisonment for up to two years and taxing all the existing SMSF assets at 46.5% on both income and capital.

The process of starting a SMSF requires a person to decide to establish the SMSF, then Trustees are appointed and these Trustees resolve to operate the SMSF on behalf of members in accordance with the superannuation law and the Trust Deed of the SMSF.

This will require written documentation for each step including minutes of meetings, completion of ATO registration forms and applications and death benefit nominations for each member.

To ensure that the proper documentation is prepared, and ensure the tax concessions are maintained and the appropriate asset allocation is determined, it is recommended that professional advice and assistance be sought.

SMSFs can be established as either Member controlled or Employer controlled. This means that on issues where the superannuation law does not require the Trustees to determine matters then the Founding Member (Member controlled) or Employer (Employer controlled) has the ability to recommend the course of action to be undertaken by the Trustees.

As people change employers more frequently and with the introduction of Choice of Fund for superannuation most new SMSFs are currently established as Member controlled.

As a general rule, all members must be Trustees or a Director of the Trustee Company and all Trustees must be Members. If any Trustee is an employee of another Trustee they must be related.

There are special rules for single member funds. If there are individual trustees, there must be two Trustees of which one is the Member. If there is a Company Trustee, it may be either a one or two Director Company, and one Director must be the Member.

Finally all individuals involved in the trusteeship must declare that they not been convicted of a dishonest act, are bankrupt or insolvent or disqualified from acting as a Trustee. A written acknowledgment that trustees are aware of their role and responsibilities is also required.

Membership of your SMSF is not restricted to employed persons. If you are not working but have benefits in another superannuation fund it is possible to roll those benefits into your SMSF.

You can include spouses and children (including those under age 18) in your SMSF provided you do not have more than 4 Members in total. Each member will have an application form completed and submitted to the Trustees for approval before joining.

If the Trustees wish, it is even permissible to establish membership for an ex-spouse of a member as a consequence of divorce where the superannuation benefits are to be split.

The SMSF may allow Classes of membership to be established by the Trustees. This means the Trustee can provide different benefits, investment strategies and conditions for individual members or groups of members.

You may contribute to the Fund while you are working or at any other time while you are under age 65. If you are over age 65 and under age 75 you must have worked for at least 40 hours in a period of not more than 30 consecutive days during the year, before you can contribute in that financial year. A statement confirming this work status will be required to be provided to the Trustees of the Fund.

The Trustees are required to formulate a written investment strategy for the SMSF in accordance with the superannuation law. This strategy must take into account matters such as the risk, return, and liquidity of each investment made, the extent to which the investments are diversified across different asset classes as well as the impact on the SMSF's cash flow requirements and liabilities.

The Trustees are able to provide differing investment strategies for each Member or class of Members. This can be done to reflect the different requirements of Members and particularly can occur when there are both pensioner and contributing Members.

It is generally prudent to seek professional financial planning advice to determine the appropriate asset allocation percentage for the SMSF.

In terms of the actual asset classes in which the Trustee can invest there are no specific prohibitions but each acquisition must be in accordance with the investment strategy of the SMSF.

The superannuation law does impose some restriction in regards to related party assets, referred to as “in-house” assets. These cannot generally exceed 5% of the SMSF’s market value. An “in-house” asset is usually a loan to, an investment in, or a lease or leasing arrangement with, a related party.

A related party means Members of the Fund, their relatives and associates, employer sponsors of the Fund and their associates and any other entity where total holdings or interests of these parties would control that other entity.

Similarly, the SMSF is restricted in terms of acquiring of assets from related parties with limited exceptions. The major exceptions that are allowed are listed securities, units in widely held trusts, business real property and certain investments in non-geared related trusts and companies.

SMSFs are able to borrow for only specific purposes such as short- term financing to pay a benefit or cover a securities settlement. These borrowings cannot exceed 10% of the SMSF value and must be repaid within 90 and 7 days respectively.

• The underlying asset must be an asset the SMSF could acquire directly, subject to the normal in house asset rules and acquisition from related party rules.
• The SMSF acquires beneficial ownership of the underlying asset that is held on trust for it and will acquire legal ownership once the completion of the instalment payments has been made.
• The lender has limited recourse to the SMSF extending only as far as the SMSF’s right over the underlying asset.