How much super do you need to set up an SMSF?

Ongoing costs 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 super legislation. 

An SMSF may also need to pay actuarial costs to determine eligible member pension payments. Then there are optional costs, such as fees for professional investment advice or management services (if fund trustees choose to hire them).

And it doesn’t end there. There are also costs associated with winding up an SMSF. The amount will depend on the complexity of your SMSF’s financial arrangements and the wind-up process.

ATO statistics

The table below shows the latest available ATO statistics (for 2017/18) for the average expense ratios of SMSFs with different fund balances. (The expense ratio expresses expenses as a percentage of the total fund balance.)

The operating expense ratio includes the typical ongoing costs of running an SMSF, while the total expense ratio captures additional expenses such as interest, insurance premiums and investment fees.

Source: ATO 2017/18

This ATO table highlights that the expense ratios are significantly higher for funds with lower balances. The cost-benefit of running your own SMSF begins to improve for balances above $200,000, but even more so from $500,000. Even so, it’s worth remembering that:

• Funds in their early years of operation may require more professional advice until their trustees become more comfortable with their responsibilities
• Some SMSFs are established with a relatively low balance in the expectation that members will quickly build up savings
• SMSFs with low balances are more likely to include funds that are in the retirement phase.

Analysis by SMSF accounting software provider Class reveals that more than 50% of SMSFs with balances lower than $50,000 are either newly established or are in the drawdown phase. What’s more, the average length of time an SMSF remains with a balance of less than $50,000 is less than two years, so they aren’t paying a high ratio of fees indefinitely.

The latest ATO figures show that 35% of SMSFs are established with between $200,000 and $500,000. A further 18% begin with $100,000 to $200,000, while 19% have $500,000 to $1 million in assets in their establishment year. And roughly 50% of people start their SMSF between the ages of 35 and 49, as their incomes rise and they still have plenty of time to build wealth before they retire.

ATO statistics also show that, as of June 2018, the median taxable income for SMSF members peaked at $89,243 at ages 45 to 49. The median member balance peaked at $594,855 as members hit their early 70s.

And while older members are less likely to have start-up costs, SMSFs with the highest balances (over $1 million) and the most complex financial arrangements tend to spend the most in dollar terms on optional costs. This includes expenses for interest, insurance premiums and investment expenses.

Productivity Commission analysis

The Productivity Commission’s Superannuation: Assessing Efficiency and Competitiveness Report stated that total annual costs for SMSF members rose from an average of $5,300 in 2013 to $7,200 in 2016. (The more recent ATO statistics for 2017/18 reveal average annual expenses of $14,879 and median expenses – which reduces the distorting effect of a small number of very large funds – of $7,710).

The Productivity Commission report further pointed out that:

• SMSF costs do not allow for the cost of members’ time in actively managing their fund (if they choose to do that rather than outsourcing fund management tasks to professionals)
• SMSFs that have been in existence for five or more years tend to have slightly lower costs than those that are newly established
• SMSFs with balances under $500,000 (about 42% of all funds) reported significantly higher expense ratios per member than public super funds
• The proportion of new SMSFs with balances lower than $100,000 has fallen from 35% in 2010 to 23% in 2016 (and less than 21% in 2018 according to the most recent ATO figures)
• Reported costs for SMSFs with balances over $1,000,000 are broadly comparable to those of public super funds.

ASIC recommendations

ASIC currently cautions financial advisers that recommending a client start an SMSF with a balance below $500,000 may not be in the client’s best interests. Financial advisers are legally obliged to provide advice that is in the best interests of their clients, and ASIC is responsible for administering their compliance with this obligation.

ASIC’s view is based not just on costs, but also on returns. It says that, on average, SMSFs with balances above $500,000 have returns that are competitive with industry and retail super funds after expenses and tax.

ASIC warns that starting an SMSF with a balance below $500,000 is unlikely to be in a client’s best interests unless:

• The client is willing and capable of taking on the bulk of the ongoing administration and management of the fund to reduce costs
• A large asset from another fund is soon to be transferred into the SMSF (for example, a member’s inheritance or a rollover from another super fund).

See also: Is $1 million really the magic number to start an SMSF?

The bottom line

SMSF costs are proportionally higher for funds that have lower balances. These costs include establishment, ongoing and wind-up expenses, but also non-financial costs such as time you spend operating your fund. So, if you are considering setting up an SMSF, it’s important for the benefits to outweigh the costs.

The information contained in this article is general in nature. It’s best to seek independent professional advice to determine whether setting up an SMSF is appropriate for your individual financial needs and circumstances.