How to Set Up an SMSF for Property Investment

Self-Managed Super Funds (SMSFs) are popular among Australians for many reasons. They give you greater control over your retirement savings, help you diversify your investment portfolio, and allow you to enjoy numerous tax benefits.

If you’ve been wondering how you can set up an SMSF for property investment, you’ve come to the right place. 

This guide gives you a step-by-step process to help you set up your SMSF. It also covers post-SMSF considerations and generally everything you might want to know about the process.

Is It Possible to Set Up Your Own SMSF? Here’s What You Need to Know

Yes, it’s possible to set up your own SMSF. But you need to set it up correctly so that it may be eligible for tax concessions and receiving contributions. Property setup also makes it easier for administration. 

The setup process is complex with strict compliance rules enforced by the Australian Taxation Office (ATO). While it’s a DIY process, it would be best to seek professional advice and guidance to avoid common pitfalls and any loopholes.

If you follow each step provided in this guide, you’ll be on your way to starting your SMSF on the right footing.

How to Set Up Your SMSF: A Step-by-Step Guide

Here are 9 steps to follow when setting up your SMSF:

1. Consider professional assistance
2. Decide your trusteeship structure
3. Formally select and appoint your SMSF’s trustees or directors
4. Establish the trust and draft the trust deed
5. Verify your fund’s Australian status
6. Register your fund and obtain an ABN
7. Open a bank account for your fund
8. Obtain an electronic service address
9. Develop an exit strategy

Let’s have a closer look at each of these steps:

Consider Professional Assistance

Before you start setting up your SMSF yourself, it’s important to understand that managing and operating one comes with heavy responsibilities. As an SMSF trustee, your role demands a high level of accountability.

Your responsibilities involve developing a robust investment strategy based on the fund’s retirement goals and strictly following SMSF rules and regulations. 

You want to get it right since breaching these laws can lead to heavy penalties.

This is why you should consider seeking professional assistance. Consult with legal professionals, financial advisors, tax specialists, accountants, and buyer agents specializing in SMSF property investments.

Decide on Trusteeship Structure

You have two SMSF trusteeship structures to choose from— individual trustee and corporate trustee.

• Individual trustee – Made up of between two and six trustees. Here, all members of the SMSF are trustees and they’re responsible for the fund’s operations and management. This structure has lower running costs than corporate trustees. 
• Corporate trustee – In a corporate trustee, a company acts as the trustee and every member is a director. The major benefit of this structure is that the company stands even if one director dies or resigns. This structure is also more suitable if you desire to be the sole director of the company and the sole member of the SMSF. 

If you’re wondering which trustee structure is most suitable for you, it’s best to think long-term. Consider succession planning and administrative efficiency. If these are your priorities, it might make more sense to choose the corporate trustee structure.

If your priority is saving costs in the long term, it might make more sense to prefer an individual trustee structure.

Formally Select and Appoint Your SMSF’s Trustees or Directors

To form a new fund, you need to appoint directors or trustees under the fund’s trust deed. Members of your SMSF must be eligible to be trustees or directors and understand their roles.

Here are some questions to ask yourself to evaluate if the SMSF trustees and directors meet the eligibility requirements:

• Are they of legal age? They must be over the age of 18 years and not be under legal disability (such as mental incapacity). Members under the age of 18 years can appoint a parent, guardian, or legal representative to be a trustee or director on their behalf.
• Have they ever been convicted of a dishonest offense in any territory, state, or foreign country? If yes, they’re not allowed to hold the trustee or director position.
• Have they ever been issued with a civil penalty order? The trustees or directors should never have contravened a civil penalty provision.
• Have they previously been disqualified by the Australian Tax Office (ATO) or the Australian Prudential Regulation Authority (APRA)? The Commissioner of Taxation or the Federal Court can permanently disqualify an SMSF member from holding the trustee or director position.

You can apply for a waiver of the member’s disqualification status if they served an imprisonment term of less than two years or a fine of less than 120 units was applied.

On top of that, the trustees and directors must understand the following roles:

• Act honestly in all SMSF matters
• Prioritize all members’ interests when making SMSF decisions
• Manage the fund separately from superannuation affairs
• Understand and meet all responsibilities and obligations
• Ensure the SMSF complies with all relevant laws and regulations

All trustees and directors must consent in writing to their appointment and sign the Trustee Declaration within 21 days. They will also need to obtain a director identification number (director ID).

Establish the Trust and Draft the Trust Deed

Investing in an SMSF property begins with establishing the trust itself. This process starts with drafting a trust deed.

This legal document lays the foundation for your SMSF by outlining its structure, objectives, the responsibilities of the members, the trustees or directors, their powers, and the investment guidelines.

The trust deed together with super laws form the rules that govern SMSFs. It’s a complex document that needs to be:

• Drafted by a competent professional
• Signed and dated by all trustees or directors
• Executed in accordance with the state or territory laws
• Regularly reviewed and updated accordingly

To establish your fund, you must set aside assets for the benefit of your members.

Verify Your Fund’s Australian Status

To receive tax concessions, your fund needs to be regulated under Australian laws at all times during the financial year. An SMSF must meet the following residency conditions to be considered an Australian super fund:

• Must have been established in Australia, or at least one of its assets is located in Australia
• The central management and operation of the fund is located in Australia (you could still meet this requirement if your central management is temporarily outside Australia for a maximum of two years)
• The fund has no members who hold at least 50% of either the total market value of the fund’s assets or the sum of the amounts that would be payable to the members if they decided to leave the fund

Register Your Fund and Obtain an ABN

Once you have created the fund and appointed trustees or directors, you have 60 days to register the SMSF with the ATO by applying for an Australian Business Number (ABN).

Make sure you ask for a Tax File Number (TFN) for your SMSF. Also, apply for your SMSF to be regulated under the ATO. If you don’t, your fund won’t be eligible for tax concessions and the member’s employers can claim contribution deductions. If needed, register for Goods and Services Tax (GST).

Registering your fund and obtaining an ABN will be easier if you have the right information at hand during the application. These details include:

• Previous ABN or TFN – You’ll be asked if the entity you’re registering has previously held or currently has an ABN and TFN. If yours is a new SMSF, you’ll have to apply for a new one.
• Type of fund – You will need to say that your fund is a superannuation fund and an ATO-regulated self-managed superannuation fund. Also, provide the structure of your superannuation entity.
• Resident status – The SMSF must be an Australian super fund
• Tax agent details – If you’re using the services of a tax agent, you’ll need to provide their registration number
• Name of SMSF – The name you provide during registration must be the name you used when creating the fund’s trust deed
• Date the SMSF came into existence – This is the date you created the trust
• SMSF business details – Provide at least one business address for the SMSF. For each address, you’ll provide a street address, email and phone contacts, and business activity details
• Electronic fund transfer details – The fund must have a bank account in the name of the SMSF where member contributions and rollover will be paid. It also needs a bank account for tax refunds.
• Authorised contact details – The fund must nominate one authorised contact
• Associate details – SMSF associate contacts are the individual trustees, corporate trustees, members, and directors of the corporate trustee

You can use the ABN Lookup and Super Fund Lookup portals to check your fund’s registration details.

Open a Bank Account for Your Fund

You must set up an SMSF bank account to manage the fund’s operations, receive member contributions, accept super rollovers, accept investment income, and pay the fund’s expenses.

You need to ensure that the bank account is unique to the SMSF and recorded correctly with ATO. If the SMSF bank account isn’t unique, the member’s retirement benefits might not be protected.

A unique bank account is one that’s not used by another entity or individual. It must be separate from the trustees, directors, or related employers’ individual bank accounts. 

Banks usually provide an account for your fund once you’ve registered it and obtained an ABN.

Obtain an Electronic Service Address

If your SMSF receives contributions from employers (other than related-party employers), you must be in a position to receive the contributions and associated SuperStream data electronically.

SuperStream is a data and payment standard that applies to all super transactions to any super fund, including SMSFs. To receive SuperStream data, you need an electronic service address (ESA).

An ESA is a special internet address, separate from an email address.

You can receive an ESA from your administrator or you can use a SuperStream message solution provider.

Once you receive your ESA, you must update your information with ATO.

Develop an Exit Strategy

As previously mentioned, it’s always best to think long-term. Consider what happens if your SMSF ends. Sometimes you might face some unforeseen circumstances that make it difficult to manage the fund. 

For example, there might be a relationship breakdown among the trustees, a trustee might die, or a director might get into an accident or go through an illness that makes them incapacitated.

Having an exit strategy in place could make the unforeseen circumstances bearable and give you direction. 

You can consider the following as part of your exit strategy:

• Make the SMSF records and electronic transaction accounts accessible to all members
• Have specific rules in your trust deed that become applicable during events that could lead to the fund becoming unmanageable
• Have all members make binding death benefit nominations (and renew them every three years)
• Encourage members to appoint an enduring power of attorney
• Factor in costs associated with winding up the SMSF

How To Use Your SMSF To Buy an Investment Property

Once you have everything in order, you can start looking for an ideal property to invest in through the SMSF— whether residential or commercial.

Ensure the property you invest in passes the “sole purpose” test. This means that the asset needs to be held for the sole benefit of providing retirement benefits to the SMSF members, or their dependants if the member dies before retirement.

On top of the sole-purpose test, the asset needs to meet the following conditions:

• The property must not be purchased from a related party of a fund member
• The property must not be used as a residence by any of the fund’s members
• The property cannot be rented out to a relative of the fund’s members
• If buying a commercial property, it can be rented to a related party or fund member but must be at the market rate

Keep in mind that you’re not allowed to purchase a property or vacant land for improvement or development. For a residential property, a trustee can only occupy it after retirement and once the title is transferred from the SMSF.

Understanding SMSF Loans for Property Investment: Essential Requirements and Lender Criteria

You can also secure an SMSF loan to buy an investment property through a Limited Recourse Borrowing Arrangement (LRBA). With this arrangement, the property is kept in a separate holding trust until the loan is fully repaid.

Rental income from the investment property plus super contributions from the members go towards settling the SMSF loan and property expenses. You won’t have to pay for anything from your pocket.

Lenders have various criteria they use to evaluate your SMSF loan application, such as fund history, financial stability, investment strategy, and fund assets.

If you choose to follow this route, ensure you get a pre-approval from a lender to gauge how much your fund can borrow. This is especially helpful since some lenders have stringent requirements for SMSF loans.

For example, some have higher deposit requirements for lower loan amounts, while others might require you to have a 10% minimum liquidity amount in your fund.

Post-SMSF Setup Considerations: What You Need to Know

Establishing and setting up the SMSF is only part of the equation. Once the fund is registered, you must regularly perform compliance checks, update your records, and streamline your investment strategy with changing member needs.

To stay on top of ongoing compliance, you need to consider the following activities:

• Lodging income tax returns
• Appointing an independent auditor to conduct an annual audit
• Preparing financial reports and member benefits statements every year

Also, your investment strategy shouldn’t be static. Regularly review it and update it to ensure it reflects the fund’s objectives and members’ needs and retirement goals.

Staying up-to-date with your records and meeting all lodgment deadlines helps you avoid penalties.

The Costs of Setting Up and Running an SMSF

Initial Setup Costs

Initial setup fees are the costs incurred when establishing the SMSF. SMSF setup costs are often overlooked and most Australians are surprised by the amount of work and money required upfront. 

You can expect the following costs when setting up the SMSF:

• Trust deed
• Investment strategy
• ATO application forms
• Binding death benefit nominations
• Hiring professionals, such as financial advisors and lawyers

The cost of setting up an SMSF depends on the amount of work required and the trustee structure. For example, you’ll spend more on setup costs for a corporate trustee structure due to the establishment expenses for a company structure.

Also, some SMSF providers may lower the initial setup costs to lure more customers into contracts with expensive ongoing costs. Always compare service provider charges to ensure you’re getting a competitive rate before getting into the contract. 

At a minimum, expect to spend around $1,000 for the trust establishment and around $3,500 for expert advice.

Ongoing Running Costs

You’ll need to pay ongoing running costs for the SMSF’s management, administration, and compliance. These costs include:

• ATO supervisory levy ($259)
• Auditing fees (around $600)
• Accounting and administration
• Financial statement and tax return preparation
• Investment management fees
• Regulatory and compliance fees

If you’re in the accumulation phase (pre-retirement), many of these ongoing running expenses are tax-deductible. However, poor SMSF administration could reduce the effectiveness of your fund.

Also, the cost of hiring an accountant, auditor, and tax specialist depends on the assets in your SMSF and the experience of these service providers.

For example, a single-member fund with a few assets will have cheaper running costs compared to a multi-member SMSF with a handful of assets.

Cost-Benefit Analysis

It’s important to conduct a cost-benefit analysis to determine whether an SMSF is a financially viable option for you. 

While the setup and running costs may seem quite high, the potential benefits of investing through an SMSF, such as greater control over investments and possible tax advantages, may outweigh the expenses

Looking to invest in property with your SMSF? Speak to us today!

SMSF properties are a perfect way to diversify your investment portfolio and set yourself up for retirement. However, setting up one isn’t that easy. There are many rules and guidelines that you need to comply with. That’s why you should work with an expert.

Wayfinder can assist in establishing an SMSF, providing guidance on legal and regulatory compliance.

Contact us today for a consultation and to learn more about leveraging SMSF for property investment.