If you have been thinking about the idea of setting up a SMSF, but you’re not sure whether your personal financial situation would deem the move appropriate – Fortis Accounting Partners has put this article together to give you a slightly better understanding of what necessary steps must be taken, what running a SMSF actually involves – and how much money would be ideal to have before such a venture should be undertaken.
Using a self-managed super fund (SMSF) may be suitable for some as a way of saving for retirement, but it’s not the right choice for everyone. Many factors must be taken into account, such as the fact that unlike an industry or retail super fund, SMSFs aren’t subject to APRA protections. Thus, in the event of theft or fraud resulting in financial loss, SMSF members can’t apply for compensation via the Government’s Superannuation Compensation Scheme.
There are of course some major benefits linked to Self-Managed Super Funds – such as increased flexibility and control over investment decisions.
Many clients will see the overarching benefit of having a SMSF as having the control over a significantly wider choice of investments (e.g. direct shares, property, hedge funds, art etc.) compared to commercial superfunds. For many, though – the real benefit within this context is having the ability to put in place more sophisticated investment strategies.
Tax can also be significantly reduced (even completely eliminated via ATO refunds in some cases) through either thoughtful investment planning or internal structuring; especially for retirees. There is also vast flexibility with regard to dealing with the funds tax liabilities, as only one tax return is required, regardless of how many fund members there are.
Running a SMSF provides the chance to transfer personal shares and other listed securities straight into superannuation – and on top of this; the fund can continue after your death; allowing for many estate planning benefits which could positively impact living family members.
Clients should note that in order to establish and manage a SMSF you need to be an Australian resident. If you expect to reside overseas for extended periods (1-2 years or more), then advice may be needed. The ATO has strict regulations regarding extended leave from Australia, and if you don’t follow the guidelines implicitly your SMSF could be deemed non-compliant and incur heavy penalties.
All SMSF’s also need to meet a sole purpose test to be eligible for the tax concessions normally available to superfunds. This means that the fund must be maintained for the sole purpose of providing retirement benefits to your members, or to their dependants if a member dies before retirement.
ATO Educational Video Series: SMSF
Trying to dodge the sole purpose test is extremely serious. In addition to the SMSF losing its concessional tax treatment, trustees could face both civil and criminal penalties.
A key difference between ‘regular superfunds’ and a SMSF is that each member of a SMSF is also a trustee.
Individuals might not be eligible to be a trustee if they:
- Are classified as an undischarged bankrupt;
- Are mentally incapacitated; or
- Have been charged with certain criminal convictions.
An individual under the age of 18 can be a member of an SMSF, but not a trustee.
Being a trustee means you carry all responsibility for the operations of your SMSF including complying with the superannuation and tax laws, as well as making investment decisions.
There are strict rules governing the running of SMSF’s, and breaking the rules could see you personally fined (up to $10k per penalty), your fund could lose its ‘tax-friendly’ status and the ATO can take on other actions.
It’s worth having a close look at the requirements surrounding a SMSF’s investment strategy – these are clearly outlined in the official ATO resource below.
ATO Resource: Running a Self-Managed Super Fund (April 2013)
If you plan to carry out some of the administrative and investment work yourself, back in September 2013 Rice Warner estimated that you’d need to have at least $200k in your SMSF to enjoy the same value as a regular super fund. Their suggestion was that if you’d planned to outsource these tasks, you’d be looking at closer to $500k in order for your SMSF to provide the same value as an industry or retail superfund.
According to the latest ATO report on SMSFs, the average operating expense ratio for SMSFs is 1.10% (which works out to be $12,200 for the average SMSF balance of $1.12m).
The setup cost of a SMSF is not the only important piece of information you need to account for. Annual running costs of your SMSF are more important to the long-term viability of your fund, and will have a bigger impact on both your investment returns and the size of your superannuation account over time.
The average Operating Expense Ratio (OER; calculated by dividing a SMSF’s running costs by the value of the fund assets) for recent years was revised by the ATO back in December 2016 – so we now have a clear snapshot of costs associated with running a SMSF:
If you have a small SMSF fund balance, you can expect to devote a higher percentage of your assets to annual expenses. E.g. a SMSF with $50k or less in fund assets has an average operating expense ratio of 12.55% (equaling costs of up to $6275) according to the ATO’s statistical overview for the 2014-15 year. While the cost of a SMSF with $100k balance (6.47% of $100k) works out to be $6470.
When ASIC and Rice Warner published the 2013 paper – Rice Warner looked into the minimum cost-effective balance for SMSFs compared with larger superfunds.
Some points from the report include:
< $100,000 Not cost-effective in comparison to a large superfund, unless the SMSF could grow within a reasonable time.
$100-200,000 Can be competitive with the more expensive type of large superfunds (typically retail funds), but only if the SMSF trustees undertake some of the administrative and investing duties themselves.
$200,000< Competitive with both cheaper and more expensive large funds, provided the SMSF trustees undertake some of the administration.
>$250,000* Cheapest alternative compared with all types of super funds, provided the SMSF trustees do some of the fund’s administration.
>$500,000* If SMSF trustees require full service from SMSF administrators, then a fund balance of $500k is needed to be more cost-effective than a large superfund.
Rice Warner/ASIC Resource: Costs Of Operating SMSF’s (May 2013)
Although this article has placed a heavy focus on the financial costs of starting and running a SMSF, Fortis Financial Planning would like to stress that for most clients – a SMSF will necessarily require more attention than a regular superfund. As a trustee, you need to invest time to manage your fund.
People wanting to operate a SMSF should realistically be wanting a greater level of control over the optimisation of their retirement wealth, so it’s important that you be confident in making appropriate investment decisions in the best interests of the fund.
While this does not mean doing it all alone, you will be the person in control of its operation.
*According to the Rice Warner report, account balances larger than $200,000 were competitive with larger super funds, subject to some qualification. With this in mind; the study was conducted over four years ago, so the data shouldn’t necessarily be treated as up to date. Currently, the advised starting balance for a SMSF is between $250,000 – $300,000. The above data should not be taken as financial advice – Fortis Financial Planning strongly urges all clients to speak with our in-house Financial Planner before making major financial decisions such as switching from your current superfund to a SMSF.
