So too with farmers, with the National Farmers Federation estimating that more than 30% of farm businesses have an SMSF. 

Today, it’s widely accepted that $200,000 in assets is the accepted benchmark for establishing an SMSF. With that balance, SMSF Association research shows that an SMSF can be competitive in terms of costs and investment returns compared with larger funds.   

But with greater control comes more responsibility. It’s essential to recognise that a shared SMSF comes with risks related to member behaviour and life events such as bankruptcy, death, or divorce. Adequate preparation for these scenarios is crucial in managing a collective SMSF. 

Trustee structure: Corporate versus individual trustees

Managing an SMSF demands time, skill, and ongoing operational costs. Trustees play a vital role in ensuring legal compliance with superannuation and tax laws and possibly the Corporations Act if a corporate trustee is involved. They are responsible for making decisions in the best financial interests of all fund members, overseeing the day-to-day operation of the fund, and ensuring that the assets of the SMSF remain separate from personal assets.

The choice between a corporate and individual trustee structure is an important one, considering factors such as cost, member requirements, changes in membership, asset separation, succession planning, legal liability, and borrowing considerations. 

Choosing a corporate trustee offers several advantages, including enhanced asset and trustee protection, continuous succession, administrative efficiencies, flexibility for sole and multiple member SMSFs, and the complete separation of SMSF and personal assets. 

Although the cost may be higher, the lower impact of any administrative fines and penalties, as well as the potential long-term benefits, make the corporate trustee structure a strategic choice for many SMSFs. Most lenders for limited recourse borrowing arrangements (LRBAs) prefer an SMSF having a corporate trustee.

For those opting for the individual trustee pathway, advantages include minimising the administrative hassle and upfront costs of establishing a company to act as trustee, no Australian Securities & Investments Commission (ASIC) forms to complete to establish the SMSF, as well as not having to comply with ongoing ASIC reporting obligations.

Investment strategies and restrictions

The primary objective of managing an SMSF is to comply with all legal requirements, and this starts with formulating and implementing an investment strategy. This is not optional – the law demands an investment strategy that is reviewed regularly. 

Trustees must define the fund's investment objectives, consider diversification of the investment portfolio, maximise tax effectiveness, consider the fund’s cash flow and liquidity requirements (i.e. expenses, pension payments). 

Understanding permissible investments, setting target asset allocations, considering the insurance coverage needs of each member and beneficiaries, and assessing risk tolerance, are other considerations in creating and documenting a robust investment strategy.

There are restrictions on the investment activity that SMSF trustees can undertake. These include:  

• SMSFs cannot acquire any assets from related parties of the fund except for listed securities or business real property that meets the definition in s66(5) of the Superannuation Industry Supervision (SIS) Act. For example, an SMSF cannot buy a home or investment property from a member, their relatives or companies or trusts controlled by any of the above.
  
• SMSFs cannot place a charge over fund assets (mortgage, caveat, lien, etc).
  
• SMSFs cannot loan money or provide any financial assistance using fund assets to members or related parties. For example, trustees are forbidden from allowing a member or their relatives to rent a home that is owned by the SMSF.

Rollover process

SuperStream measures introduced for rollovers to and from SMSFs have streamlined and digitised the process. Trustees must now initiate rollovers online through SuperStream, ensuring efficiency and accuracy in transferring super benefits to their SMSF. The process facilitates the verification of member identity, regulatory compliance, and checks for potential illegal early release and fraudulent activity. These measures enhance the overall efficiency of the SMSF sector. 

New trustees need to be aware that although there is a three-day requirement for SuperStream rollovers to be enacted, this only takes effect once all the required information has been provided, so ensure any issues are resolved early if a property settlement is pending. 

Administration 

Managing an SMSF involves financial commitments, including set-up and ongoing operational expenses, which may exceed other super funds. 

Trustees must be prepared to allocate time for investment research, decision-making, and completing the ongoing administrative tasks.  

The key responsibilities to ensure a fund is compliant are:

• Establishing the SMSF - includes completing the trustee declaration and consent to act, as well as sourcing an appropriate trust deed.
• Fund registration – applying for an Australian Business Number (ABN) and Tax File Number (TFN) with the Australian Taxation Office (ATO). If using corporate trustees, ensure they have applied for their Director Identification Number (DIN) before becoming a director of the corporate trustee company.
• Appointing an independent auditor sourced from the ASIC SMSF Audit register.
• Event-based reporting – knowing when to notify the ATO about events such as starting a retirement phase income stream.
• Updating ASIC and the ATO about any fund member or trustee changes.
• Maintaining general and financial fund records, preparing and lodging the annual fund return by the relevant due date (October, February or May).
• Paying taxes and levies.
• Ensuring compliance.

Remember, the ATO can impose a range of administrative penalties on trustees if the fund is not compliant. Trustees must understand and acknowledge that they are solely responsible for their funds’ compliance and any penalties that may result from non-compliance.
 

Contingency planning for member events

SMSFs are long-term investment vehicles, and much can happen over the course of the journey. Therefore, it’s smart thinking to have contingency plans in place to deal with unexpected events. Events that require such planning include:

• Death: Following the death of a member, trustees will need to make decisions regarding the payment of death benefits to beneficiaries, taking into consideration the trust deed and any death benefit nominations the deceased made. Since the introduction of the Transfer Balance Cap (TBC), larger sums may be forced out of superannuation, so planning has never been more important. In addition, ensuring the fund trustee structure remains compliant with S17 of the SIS Act will require a review of the rules of an SMSF as outlined in the trust deed and related documents. 
  
• Diminished capacity: What are the consequences if a trustee becomes mentally incapacitated? Who will step in and act as trustee? An enduring Power of Attorney is a vital document for those considering an SMSF. 
  
• Member leaves: The impact on a fund if a member/s decide to leave. Now there are six-member funds, this could happen more frequently, so consideration needs to be given to the assets of the fund and liquidity as it could be detrimental to the fund if forced to sell an asset to facilitate the rollover for the member, especially if a limited recourse borrowing arrangement is involved. 
  
• Divorce: Family law contains several options for superannuation to be split between a couple who separate or divorce. Superannuation is treated separately to other property, so specialist advice may be needed. If both you and your former spouse are trustees, what mechanisms are in place to make decisions regarding the SMSF and its assets if the divorce is acrimonious. For example, who stays in the fund and who goes, remembering you can’t force a member to leave, often making this difficult to negotiate. 
  
• Administration: For reasons such as becoming too time-consuming, onerous, or costly, it may be necessary to wind up a fund. 
  

Risks

Embarking on an SMSF journey offers individuals, couples, and families an opportunity to take greater control over their retirement savings.  But as stated at the outset, with greater control comes more responsibility, and as a trustee it is incumbent on you to fully understand what’s involved in overseeing an SMSF, appreciating that you are ultimately legally responsible for your fund’s compliance. 

It has always been the mantra of the SMSF Association that SMSFs are not for everyone, so, before deciding to embark on this journey, ensure you fully understand what’s entailed. Getting professional advice is a good starting point. 

DISCLAIMER

The information contained in this document is provided for educational purposes only, is general in nature and is prepared without taking into account particular objective, financial circumstances, legal and tax issues and needs. The information provided in this article is not financial advice and is not a substitute for legal, tax and financial product advice. Before making any decision based on this information, you should assess its relevance to your individual circumstances. While the SMSF Association believes that the information provided in this article is accurate, no warranty is given as to its accuracy and persons who rely on this information do so at their own risk. The information provided in this bulletin is not considered financial product advice for the purposes of the Corporations Act 2001.