Many SMSF investors are in the dark about what are typical SMSF fees, and whether they are paying a fair price for SMSF advice and services.
In an ASIC report from June 2018, 32% of SMSF members found setting up and running their SMSF to be more costly than expected, compared with just 9% of SMSF members who found it less costly than expected.
On top of that the Centre for International Finance and Regulation, estimated that around 13% of former SMSF members left their fund because it was too expensive to operate.
Most ongoing fund expenses are tax deductible provided they are incurred in generating the fund’s taxable earnings, but it’s important to understand what fees you may incur setting up and running an SMSF, and what the average costs are.
People who were contemplating setting up an SMSF expected to pay an average of $1,000 to set up an SMSF and $680 per 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:
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.
An SMSF can also be set up to have 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.
No set-up fees are charged by ASIC for SMSF funds that are established with individual trustees. However, ASIC do 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,
- and 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 cost per fund of running an SMSF in 2015–16, in terms of administration and operating expenses, was $3,595 and, for investment expenses, was $4,173. This was up from $3,114 and $3,846, respectively, in 2014–15.
Source: ASIC, June 2018
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 audit which 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 fees for 2015/2016 were $694.
The average administration and operating, investment and total expense ratios for various SMSF fund sizes are listed below.
|Fund size||Average administration and operating expense ratio||Average investment expense ratio||Average total expense ratio|
|$1 – $50k||8.72%||5.33%||14.05%|
|>$50k – $100k||3.79%||3.56%||7.35%|
|>$100k – $200k||2.43%||3.97%||6.41%|
|>$200k – $500k||1.38%||1.88%||3.26%|
|>$500k – $1m||0.80%||0.78%||1.58%|
|>$1m – $2m||0.57%||0.49%||1.06%|
Source: ATO, 2015/2016
These compliance costs are necessary because SMSFs receive concessional tax treatment like public super funds do (e.g. industry, retail and government funds). Member contributions and fund investment earnings are taxed at just 15%.
In addition, an SMSF may also need to pay actuarial costs to determine eligible member pension payments.
They may also incur a range of additional optional costs, such as professional investment advice or management fees charged by financial planners if the trustees choose to hire them.
The ongoing costs for professional SMSF advice depends on the complexity of the fund’s investments. According to a recent report produced by the Productivity Commission, the average SMSF member paid $7,300 in annual ongoing fees in 2016.
The costs of winding up an SMSF depends upon:
- The complexity of its financial arrangements.
- Whether any assets sales are necessary that will incur brokerage or agent fees. For example, the selling of shares or property so that member benefits can be paid.
- The time involved in the fund’s approved SMSF auditor ensuring the legal compliance of all wind-up activities.
How does SMSF costs compare to public super funds?
Public super funds typically charge members a percentage fee based on the amount of funds being managed. SMSF fees typically aren’t charged on fund balances (i.e. they are charged flat advice and services fees instead), although funds with larger balances are likely to require more complex professional advice.
It’s worth comparing statistics on the average fees charged at different member balance levels in both public and SMSF funds. According to APRA, in June 2017 the average ongoing annual fees for public superannuation funds were 0.8% of member fund balances. In comparison the average expense ratios for SMSFs reported by the ATO vary considerably according to the size of the fund.
The following table shows the average fees for both APRA funds and SMSFs at various balances.
|Super fund balance||APRA||SMSF|
|Average fee %||Average cost||Average expense ratio %||Average cost|
Sources: APRA, ATO
These figures suggest that SMSFs cannot compete purely on a fee basis with public super funds until they have very large balances, but while fees are always important in any investment, there are many other factors to consider when evaluating if an SMSF may be right for you.
According to a 2017 report published by the CBA and the SMSF Association, 59% of SMSFs said their main reason for setting up an SMSF was to achieve better returns, 53% said to take more control over personal finances and 39% said to access a wider range of investment options. To learn more about SMSF investing see the following SuperGuide articles:
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.
To learn more about SMSF costs see the following SuperGuide articles:
The ongoing costs of running an SMSF will vary depending on the complexity of the fund’s investment activities and the balance of the fund. SMSFs may not be cost-effective for people with low superannuation balances.
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.