Tips for setting up your SMSF

It pays to be meticulous when setting up a SMSF. It's the only way to achieve a better outcome and avoid unnecessary delays.

Even if you get professional help, it's important to understand the process and the order in which things happen.

Max Newnham, an SMSF specialist and partner in accounting practice TaxBiz, says once the decision to set up a DIY fund has been made, people should switch to cash to protect themselves against sharemarket volatility and to avoid having to sell in a downturn.

"It takes a couple months to organise an SMSF and, while you may have more money as a result of the market going up, there could equally be a market crash. It's better, from a risk management point of view, to take that out of the equation."

Last month's column looked at what's involved in establishing the trust (all SMSFs are trusts), the different types of trust and why having a corporate trustee is preferable.

Before you can transfer your retirement savings to your newly minted SMSF, several things need to happen.

Once the trust deed is drawn up, the SMSF needs to be registered as a regulated fund with the Australian Tax Office. The ATO will allocate the fund a tax file number and an Australian business number. You also need to open a bank account or accounts in the SMSF's name.

"Make sure the SMSF is properly set up," says Graeme Colley, director of technical and professional standards at SMSF Professionals' Association of Australia.

"If you want the money to go into the fund you have to really understand how the game is played.

"Your [existing super] fund will look at the ATO website and, if it's not there, it won't roll over [your savings] to the SMSF. Their main concern is to do with security."

Super funds are required to have a rollover completed within 28 days but this doesn't always happen and delays of two or more months are not unusual.

"While some funds are relatively quick, others may take months to roll the benefit over. That's why it's probably better to think about the SMSF well before you are going to roll over the money," says Colley.

Apart from moving your investments into cash, you need to pay attention to insurance and assess whether the life and income protection cover you have in your old super fund should be kept before you close the account.

Group insurance within the big super funds is usually good value because it provides automatic cover and cheaper premiums. So it may be worth keeping the old fund open with a small balance.

"The cost of getting insurance in an SMSF is almost prohibitive," says Newnham.

"One of the things we advise clients to do is hold the bulk of their retirement wealth in the SMSF but keep the old fund open and have the compulsory super guarantee contributions going into it to keep the insurance going. It will often produce a better cost result."

Colley agrees it's a good strategy.

"As part of the investment strategy, you need to consider insurance for the members. In the past it hasn't been a requirement. When you consider the age of some people setting up an SMSF, while they can get insurance [outside of group insurance], it can be quite expensive."

Finally, what should the investment strategy state? It needs to be in writing to comply with superannuation rules. There is no prescribed format but it should outline the SMSF's objectives and show how it will go about building its retirement savings.

"The document needs to be in place so that when the auditor of the fund audits the accounts he can say, 'Yes, the trustees have done their investment strategy," says Newnham.

"Once they've got those words down on the page, the trustees can then say, 'We can have between zero and 100% in shares, zero to 80% in cash.'

"Or it may be more specific, that they want to hold several direct assets. It ends up being broad enough so that unless something changes drastically the trustees don't need to go back and change things.

"This is the beauty of an SMSF. The investment strategy ends up being pretty much a document of their own, as long as they have the right words in the right place to show they've signed off on things that are regarded as important."

When you invest

Your investment strategy needs to take into account:

• The need to diversify across the different asset classes and within each class.
• The risk associated with each type of investment and its likely returns.
• Expected cash flows from the different types of investments.
• How easy it is to convert investments to cash to pay future benefits and costs.

Source: Max Newnham, smsfsurvivalcentre.com.au

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