The most up-to-date and reliable information for the step-by-step process of setting up an SMSF is available through the ATO’s website. Beware trusting information outside of the ATO’s resources. The market is flooded with out of date information and guides from companies which integrate their products into the set-up process.
While the ATO’s guidance is comprehensive and a safe point of reference, there are a few key areas current and prospective SMSF trustees continue to falter.
The sole purpose test
First, and above all else, the golden rule of an SMSF is that it is for the sole purpose of providing retirement benefits to its members. Therefore, for an SMSF to be fully complying, it must meet what is known as the sole purpose test.
So, before you set up an SMSF, it’s imperative to realise that it is not the kind of trust structure that can be used to create present-day benefits. If that is your intention, other trust structures, like a family trust, may be better suited to your circumstances.
The ATO takes no prisoners when it comes to enforcing the rules around the sole purpose test – it’s is an ongoing focal point of their SMSF compliance agenda.
“Contravening the sole purpose test is very serious. In addition to the fund losing its concessional tax treatment, trustees could face civil and criminal penalties,” the ATO said.
Choosing a structure
An SMSF can have up to four members. These can be comprised of either individual trustees, or a company which serves as a corporate trustee.
While the majority of SMSFs have individual trustees, it’s fair to say the majority of SMSF professionals would recommend that you elect a corporate trustee structure. Corporate trustee structures have also been publically backed by the ATO in the past.
Director at Melbourne-based law firm DBA lawyers, Bryce Figot, said a corporate trustee is an ideal option and should be used from the point of establishment.
He noted that while some plan to implement a corporate trustee when the fund has accumulated more assets, the benefit of setting up a corporate trustee from the beginning is “larger than many realise.”
The legal documentation necessary to change a trustee is often incorrectly prepared, even by those who have been advised by a lawyer, Mr Figot said.
“Consider, for example, the case of Moss Super Pty Ltd v Hayne  VSC 158. This case involved an SMSF that had had a change of trustee. The validity of the appointment of the new trustee was challenged on the basis that the existing deed required that a certain person sign the appointment documentation in one capacity and not in the capacity that that person actually did sign,” Mr Figot said.
“Byrne J held that the challenge identified a legitimate flaw in the purported change of trustee and accordingly the entity that thought it was the new trustee was not. This highlights that any change of trustee may potentially be invalid.
“If, however, a company that was registered for the sole purpose of being a trustee is used right from the SMSF’s commencement, odds are no change of trustee will ever be needed, and thus there is no opportunity to make any mistakes.”
The trust deed
Each SMSF requires its own trust deed. This is a legally binding document which effectively covers how to establish and operate your SMSF. It’s imperative to get the terms and the details of the trust deed right from the outset, because you will need to refer to it whenever you make a decision about your SMSF.
Many SMSF members engage specialist advice for their trust deed, given that it is an ongoing point of reference and contains the governing rules of the fund. There can be serious issues down the track with the validity of other documents if they are not drafted and executed in accordance with the trust deed.
For example, Cooper Grace Ward partner Scott Hay-Bartlem said he has seen many cases where SMSF trustees believe they have binding death benefit nominations only to find out that once the deed is analysed, they are not binding at all.
“SMSF trustees need to consider if the binding nominations actually comply with the trust deed, and that you can actually pay under [these nominations] so making sure they actually work within the realms of the law and ensuring you’ve had that discussion and everything aligns up.”
All trustees and directors of corporate trustees of an SMSF are required to sign a trustee declaration, The declaration aims to ensure that new trustees understand their obligations and responsibilities.
The declaration lists key matters that you must understand in order to effectively manage an SMSF, including vital details regarding the sole purpose test, your duties as a trustee, what your investment restrictions are, and what your record-keeping, reporting and lodgement obligations are.
One simple, yet often forgotten, aspect of the trustee declaration, is that a signed copy must be kept by members.
If your SMSF will receive contributions from employers, other than related-party employers, it needs to be able to receive the contributions and associated SuperStream data electronically.
SuperStream is a data and payment standard that applies to super contributions made by employers to any super fund, including SMSFs.
An employer will need the following information about your SMSF: its ABN, bank account details, and an electronic service address.
An electronic service address is a special internet address. Your administrator may provide you with an electronic service address or you can use a SuperStream message solution provider.
It’s vital that you realise that an electronic service address is different to an email address, because it could result in your contributions being deposited to a default fund.
“This will cause them lots of problems down the track because eventually something is going to give. The clearance house or the employer is going to say, ‘well this is not working for me’ and the whole point of SuperStream and this arrangement was to make life easier for businesses,” the ATO said.
“If [businesses] don’t get the right information then they can go back to what is easy for them, which is a default fund. And we don’t want SMSFs to miss out on their contributions.”