What does it cost to run an SMSF?

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One of the most hotly contested issues in the SMSF space – between SMSF experts and the regulators – is how much it actually costs to run your own self-managed superannuation fund.

Relying on averages of all the data it has on SMSFs, the Australian Taxation Office (ATO) earlier this year released data that found average annual costs were $14,900 in 2017-18.

However, SMSF professionals hit back that this figure will be distorted by the more expensive funds with real property assets or complex investments.

To provide a definitive answer, and give SMSF trustees information they can actually use when making decisions about starting up a fund, the SMSF Association recently commissioned Rice Warner to produce a report on fees.

Rice Warner says this report is even more comprehensive than their last one in 2013 because they were able to use anonymised data from funds made available from a number of large SMSF administrators.

The new research

In its report – Costs of Operating SMSFs 2020 – Rice Warner looked at where SMSFs become broadly competitive and found $200,000 is a good indicator of where they become cost-competitive with industry and retail superannuation funds. At balances of $500,000 or more they are generally the cheapest alternative.

And in more good news, costs for SMSF trustees may actually be falling.

“The biggest change is that the costs of running SMSFs, apart from the statuary levies, most of the other fees have fallen,” senior consultant at Rice Warner, Alun Stevens, said when launching the report.

So what are the fees and how much are they?

Setup fee

Setup fees are the costs incurred for establishing an SMSF and will include costs for things such as the trust deed, ATO application forms, investment strategy and general trust advice. If SMSFs decide to use a corporate trustee structure instead of an individual trustee (see our article on the difference here) there will be some additional establishment costs for setting up the company structure.

Rice Warner has looked at fees across low cost, mid cost and higher cost funds

As you can see in table 1 below, set up costs can start at as little as $1,541 and go up to $2,459 for more complex funds that might be paying pensions. Service provider fees refer to the fees paid for services provided by accountants, financial advisers, lawyers and administrators.

Table 1: Range of costs for establishment of an SMSF

Source: Costs of Operating SMSFs 2020, Rice Warner

Ongoing administration fees

There are fees that all SMSFs need to pay to cover their annual compliance requirements. These include the ATO supervisory levy, financial statement and tax return preparation and the cost of getting the fund audited by a registered auditor. The supervisory levy is $259 no matter the size or complexity of the fund but tax return and audit fee costs will vary depending on the fund.

Table 2: Range of annual compliance administration costs

Source: Costs of Operating SMSFs 2020, Rice Warner. Table 2 shows the range of costs for funds that are accumulation only and for those that pay pensions.

These fees don’t include the annual cost of administering assets such as real property, which could cost $220 per property and $350 per borrowing arrangement, according to Rice Warner. There are also regular ongoing fees for property maintenance and rental and tenant management for SMSFs that have real property.

Also, there will be additional costs if funds decide to use the full services of an administrator. In addition to compliance administration, these extra services can include investment accounting, access to online investment platforms and different kinds of investment reporting.

Rice Warner estimates fees for full administration, which would include the ASIC and ATO fee, financial statement and tax return preparation, the audit fee plus the additional services, at $1,200 for low-cost funds, $1,820 for mid-cost funds and $2,660 for high-cost funds.

Investment fees

Rice Warner says that investment management fees can be difficult to estimate as they vary widely depending on the assets in the fund.

“The expense experience of those with direct property is very different to those without [it can be] four or five times as much,” SMSF Association CEO John Maroney said.

But for less complex investments, including direct shares, exchange traded funds and other managed funds, Rice Warner compiled the following table of average annual investment fees paid for assets.

Table 3: Investment fee range

Source: Costs of Operating SMSFs 2020, Rice Warner

For a fund with a balance of $200,000 with simple investments, annual investment fees would therefore work out at $140 a year. Combined with low administration fees of $1,189 and assuming the fund is totally in accumulation, you’re looking at annual fees of $1,329.

Pension accounts versus accumulation accounts

The research also looked at funds with pension accounts. While funds with both pension and accumulation accounts were generally more expensive to run, the annual fees incurred by SMSFs that had just pension accounts were usually cheaper than those funds with both and those with just accumulation accounts. Rice Warner put this down, partly, to pension funds having simpler investment arrangements.

Examining the total costs of all 100,506 funds in the sample, the total fees incurred for a fund in the 50th percentile with $300,000 in assets was:

• $3,194 for a fund with both pension and accumulation accounts
• $2,939 for a fund with just pension accounts
• $3,182 for a fund with just accumulation accounts.

Previous estimates by the regulators

In July, the ATO published information compiled from its collection of data on all SMSFs for the 2017-18 financial year (the most recent data available) and found:

• The average total expense ratio was 1.19% or $14,900, up 32% from $11,300 in 2013-14
• Median total expenses increased 39% from $5,600 in 2013-14 to $7,700

But, as the data from Rice Warner highlights, a compilation of all data on SMSFs, even with regard to median costs versus average costs, will be skewed by the larger and very expensive SMSFs.

The SMSF Association has said that it will use the new Rice Warner research to request that ASIC amends information on its website – and its MoneySmart consumer website – that provides cost estimates much higher than this report.

A controversial ASIC fact sheet – Self-managed super funds: Are they right for you? – stated that the average cost of running an SMSF was $13,900 a year. That fact sheet was retired earlier this year (and copies available online have been stamped with an ‘expired’ note), partly on the lobbying of the SMSF Association.

SMSF Association CEO John Maroney is optimistic ASIC will also amend information on the MoneySmart website that suggests SMSFs do not perform as well as APRA-regulated funds and will cost on average $6,152 a year to run.

The bottom line

An SMSF is not a one-size-fits-all super fund so it should be no surprise that the costs of running one are extremely varied. However, the new research from Rice Warner should provide a more useful tool for SMSFs considering starting an SMSF and wishing to understand the costs involved.

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.