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Many SMSF investors are in the dark about how much it will cost to set up and run their own fund, and whether they are paying a fair price for SMSF advice and services. And it’s easy to see why.
There is a dearth of reliable, comprehensive information on SMSF costs.
In an ASIC report from June 2018, 32% of SMSF members found setting up and running their SMSF to be more costly than expected, while just 9% of SMSF members found it less costly than expected.
An ASIC report in October 2019 titled Self-managed super funds: Are they right for you? threw the cat among the pigeons by suggesting the average cost of running an SMSF is $13,900 a year. Many applauded ASIC’s attempt to add some transparency to the issue of SMSF fees. But critics pointed out, rightly, that this figure included one-off set up and wind-up fees along with ongoing fees. And that optional and atypical ongoing fees were included that distorted the overall picture.
Enter the Australian Taxation Office (ATO), the SMSF regulator.
The big picture
In its latest statistical overview of SMSFs released in June 2020 (due to the lag in funds’ annual reporting of figures that relate to the 2017–18 financial year), the ATO has taken pains to provide a more granular breakdown of SMSF fees and costs. The results support industry claims that most SMSFs can expect to pay annual ongoing fees and costs of below $5,000. Unfortunately, the ATO doesn’t provide a breakdown of set-up and wind-up costs.
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According to the ATO, SMSF average total expenses were $14,900 in 2017–18, up 32% from $11,300 four years earlier. However, this figure is distorted by some very large funds with more complex investments that typically incur higher expenses. A more meaningful figure for most people is median total expenses that increased 39% from $5,600 to $7,700 over the same period.
SMSFs in retirement phase incurred lower average total expenses ($14,200) than funds solely in accumulation phase ($15,400).
While average total expenses as a percentage of fund size are higher for SMSFs with lower balances, the total dollar value of average and median expenses increases with fund size.
For example, for fund with balances below $50,000 the average total expense ratio was 15.37%, average expenses were $3,800 and median expenses were $1,900. For funds with a balance greater than $2 million, the average total expense ratio falls to 0.69% but average expenses were $29,500 and median expenses were $15,800. This underlines the common warning that SMSFs are not cost effective for funds with low account balances.
Most ongoing fund expenses are tax deductible provided they are incurred in generating the fund’s taxable earnings. Even so, it’s important to understand the fees you are likely to face when setting up and running an SMSF, which of those fees and services are unavoidable and which are optional, and what the average costs are.
According to ASIC surveys, people who were contemplating setting up an SMSF expected to pay an average of $1,000 to set up an SMSF and $680 a year for the ongoing administration and advice costs associated with running an SMSF. The actual cost of setting up an SMSF, however, has been estimated to range from $916 to $2,035.
Source: ASIC, June 2018
SMSF set-up costs include fees for professional advice, such as legal and accounting charges. This advice is necessary for:
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Setting up the structure of the fund
SMSFs must be set up with trustees who are responsible for:
- Preparing the SMSF’s investment strategy
- Making the fund’s investments
- Accepting SMSF member contributions
- Appointing an approved auditor who is currently registered with the Australian Securities and Investments Commission (ASIC)
- Lodging the SMSF’s annual tax return with the Australian Taxation Office (ATO)
- Paying member investments
- Keeping SMSF records to ensure regulatory compliance.
An SMSF can have two to four individual trustee/s who are members of the fund. Alternatively, an SMSF can be set up with a corporate (company) trustee, provided that all members of the fund are directors of the corporate trustee, and vice versa. A company acting as a corporate trustee for an SMSF can currently have between one and four directors.
As at June 2019, 61% of SMSFs had a corporate trustee with the remaining 39% opting for individual trustees. However, the clear trend is to a corporate trustee, with 82% of newly registered SMSFs choosing this option in the three years to June 2019.
No set-up fees are charged by ASIC for SMSF funds that are established with individual trustees. However, ASIC does charge a fee to register a corporate SMSF trustee. Corporate trustees are also charged an annual fee by ASIC.
Setting up the SMSF trust deed
An SMSF must have a trust deed. This is a legal document that outlines:
- How the fund will be established
- How it will operate
- How it will be administered.
The trust deed must be compliant with superannuation legislation, so obtaining professional advice for its preparation is essential.
As with many things, the set-up can vary considerably depending on the complexity of the arrangements and the type of professional advice obtained.
The average annual operating expenses for SMSFs were $6,152 in 2017/18, up from $5,557 in 2013/14. However, when rising super balances are taken into account the average operating expense ratio drops over the same period from 0.52% to 0.49%. As mentioned earlier, however, these averages are distorted by very large funds. The median operating expense in 2017/18 was a more modest $3,923.
SMSFs can have a number of ongoing costs to ensure compliance with superannuation and taxation legislation.
These costs can include:
- The preparation of financial statements
- The preparation and submission of a tax return to the ATO
- The payment of a compulsory annual SMSF supervisory levy to the ATO
- A corporate trustee fee (if applicable)
- An annual audit of all financial records. This must be conducted by an ASIC-approved auditor to ensure that all fund activities are fully compliant with superannuation legislation. However, this annual audit requirement will be changed to a three-year requirement from 1 July 2019 for SMSFs who have a satisfactory record-keeping and compliance history. According to the ATO, the average auditor fee for 2017/18 was $679 while the median auditor fee was $550.
The average operating and total expense ratios for various SMSF fund sizes are listed below. As you can see, the bigger the fund the more cost effective it is to run.
|Fund size||Operating expense ratio||Total expense ratio|
|$1 to $50,000||8.2%||15.4%|
|$50,000 to $100,000||3.4%||7.3%|
|$100,000 to $200,000||2.2%||6.7%|
|$200,000 to $500,000||1.3%||3.7%|
|$500,000 to $1 million||0.8%||1.7%|
|$1 million to $2 million||0.5%||1.0%|
Source: ATO 2017/18
These compliance costs are necessary because SMSFs receive concessional tax treatment just as public super funds do (that is, industry, retail, corporate and government funds). Member contributions and fund investment earnings are taxed at just 15%.
In addition, an SMSF may need to pay an actuary to determine eligible member pension payments.
They may also incur a range of additional optional costs, such as professional investment advice, insurance, interest on borrowings within the fund or management fees charged by financial planners if the trustees choose to hire them. The average and median cost of these and other types of expenses in 2017/18 are outlined in the table below.
|Expense type||Average cost||Median cost|
|Interest expense within Australia||$16,574||$12,881|
|Interest expense overseas||$13,706||$9,453|
|SMSF auditor fee||$679||$550|
|Management and admin expenses||$4,503||$2,808|
|Forestry managed investment schemes||$5,464||$2,538|
Source: ATO 2017/18
The ATO further breaks down average ongoing SMSF expenses by fund size.
As you can see from the graph below, the relatively small number of very large funds with over $2 million in assets not only have higher average expenses but they are much more likely to have higher optional or less common expenses. In particular, interest expenses relating to borrowings rise dramatically for funds with assets over $1 million, followed by investment expenses.
*For transparency, Other deductions have been excluded from Operating costs in the graph. Operating costs includes SMSF auditor fee, management and administration expenses and supervisory levy.
Source: ATO 2017/18
The distorting effect of the investment preferences at the big end of the SMSF spectrum helps explain how the ATO and ASIC arrive at such high figures for total average expenses of $14,879 and $13,900 respectively.
According to the SMSF Association, if you take a fund with a typical establishment balance of between $200,000 and $500,000, and strip out avoidable costs such as investment expenses, insurance, interest and forestry MIS, the median operating expense is roughly $3,400.
To learn more about SMSF investing see the following SuperGuide articles:
- SMSF investment rules: Collectables and personal use assets
- What are the SMSF borrowing rules?
- How to create an SMSF investment strategy (including example documents)
- How to achieve genuine diversification in an SMSF
- How do SMSF retirees invest?
- 10 steps to buying a commercial property and leasing it to your SMSF
- What on earth is an in-specie transfer?
- How to invest in infrastructure through an SMSF
- ETFs: How do I use them and what do they cost?
- SMSF guide to hedging
- SMSFs and property: A Super Guide
- The definitive SMSF guide to franked dividends
- SMSF investment rules: What every trustee should know
The costs of winding up an SMSF depends on:
- The complexity of its financial arrangements
- Whether any assets sales are necessary that will incur brokerage or agent fees. For example, selling shares or property so that member benefits can be paid
- The time it takes the fund’s approved SMSF auditor to ensure the legal compliance of all wind-up activities.
What SMSF expenses can you claim?
It also needs to be remembered that most ongoing SMSF costs are tax deductible from the fund’s earnings, provided they are consistent with executing the fund’s investment strategy (as outlined in its trust deed).
Common tax deductible SMSF expenses include:
- Ongoing fund management, administration and audit fees, including the preparation of all financial statements to ensure compliance with taxation legislation
- Investment-related fees, such financial advice, bank charges, rental property expenses, brokerage, or interest charged on SMSF investment property loans
- The SMSF supervisory levy
- Life, total and permanent disability, terminal illness and income protection insurance premiums paid on behalf of SMSF members.
However, the costs of setting up an SMSF are generally not tax deductible, as they aren’t specifically related to the fund’s taxable earnings. For example, the setting up of the trust deed is not an expense associated with the fund’s earnings, unlike investment-related fees.
Similarly, many of the costs associated with winding up an SMSF are not tax deductible unless they relate specifically to the fund’s earnings or to the capital gains made on the disposal of any fund assets.
The ongoing costs of running an SMSF will vary depending on the complexity of your fund’s investment activities and your fund’s balance. SMSFs may not be cost effective for people with low superannuation balances of $200,000 or less.
The information contained in this article is general in nature. It’s best to seek independent professional advice based on your individual financial circumstances and goals.
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