An SMSF is a trust, not a trading account

The Australian Taxation Office (ATO), which regulates SMSFs, describes an SMSF as a trust set up for the sole purpose of providing retirement benefits to its members. In an SMSF the members are the trustees, so the trustees are responsible for running the fund within the law at all times.

A fund can have up to six members. Trustees can act as individual trustees, where every member is a trustee, or use a corporate trustee, where a company acts as Trustee and each member is a director. Each structure carries different costs, paperwork and rules around adding or removing members.

The choice affects how Assets are titled, how the fund copes if a member dies or loses capacity, and how straightforward it is to change the membership later.

The setup steps behind the scenes

Establishing a fund involves a trust deed being prepared, trustees appointed, and each trustee signing the ATO trustee declaration confirming they understand their duties, generally within 21 days of appointment. The fund must be structured so its assets are held separately from personal or business assets.

The fund is then registered with the ATO, elected to be regulated so it qualifies for concessional tax treatment, obtains a tax file number and an Australian business number, opens a dedicated bank account and sets up an electronic service address to receive contributions.

A fund that is not correctly established or registered may not be recognised as a complying fund, which puts its concessional tax treatment at risk from the outset.

Duties that never go away

Once running, trustees must act honestly and with the care, skill and diligence of an ordinary prudent person. This includes meeting the sole purpose test, keeping the fund's money and assets separate from personal assets, preparing and following a written Investment strategy, valuing assets at Market Value each year, keeping detailed records, arranging an independent annual audit and lodging the SMSF annual return.

These are legal obligations. Professionals can be paid to help, but the responsibility for meeting them stays with the trustee. The ATO can impose administrative penalties, issue rectification or education directions, or in serious cases disqualify a trustee.

The obligations also interact with one another. A sound investment strategy supports the valuation and audit process, good records make the annual return straightforward, and staying within the contribution and preservation rules keeps the fund complying.

Time and skill requirements

The ATO states that trustees should be certain they have the knowledge, time and skills to run a fund before starting. Investing is one skill; keeping compliant records, understanding contribution and preservation rules and staying current with changing law are separate skills. Superannuation rules change regularly.

A hypothetical example

Consider a hypothetical example. Priya and Sam set up an SMSF mainly to hold Australian shares. Choosing the shares took an afternoon. The ongoing rhythm of the fund involved documenting decisions, tracking each member's contributions against the caps, arranging valuations, briefing an auditor and lodging on time. The investing was one part of the process; the administration was the larger, ongoing commitment.

The annual cycle

Contributions must be tracked against the caps as they are received, the investment strategy is reviewed at least once a year, assets need valuing at 30 June, and the audit and annual return follow after year end.