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

How much super you need to set up an SMSF is very contentious issue. It has been the subject of considerable analysis from the Australian Taxation Office (ATO), the Australian Securities and Investments Commission (ASIC) and the Productivity Commission.

However, there are still no clear answers. In this article, we’ll provide you with statistics and perspectives on this issue.

It’s important to understand that there are both set-up and ongoing running expenses associated with establishing and operating your own SMSF. It’s obviously important that the benefits outweigh these costs by as much as possible.

Set-up costs include professional legal and accounting advice to establish the SMSF’s trust structure and trust deed.

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 audit which must be conducted by an ASIC-approved auditor to ensure that all fund activities are fully compliant with superannuation legislation. 

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 or advisers  (if fund trustees choose to hire them).

There are also costs associated with winding up an SMSF. These costs depend upon the complexity of the SMSF’s financial arrangements and the wind-up process.

ATO statistics

The table below shows the latest available ATO statistics (up to 2016/2017) for the average expense ratios for SMSFs with different fund balances.

Source: ATO

This ATO table highlights that the expense ratios are significantly higher for funds with lower balances. However, it’s important to note that these expense ratios include fund set-up costs. These costs are incurred when funds are first established, and so are much more likely to be included in the statistics of funds with lower balances. In addition:

• Funds in their early years of operation may require more professional advice until their trustees become more comfortable with their responsibilities.
• 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. Their analysis further reveals that 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 the highest ratio of fees indefinitely.

Funds with higher balances on the other hand are more likely to have been operating for several years or have active contributors who are not in the drawdown phase.

These higher balance funds will therefore not have their set-up costs included in their statistics, and they can potentially have less need for professional advice if their trustees are experienced in fulfilling all their obligations. More half of all SMSFs have been operating for at least 10 years, and many funds will move into higher balance categories with member contributions and investment earnings over time.

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 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 per cent of all funds) have 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.
• 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 $200,000 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 warns that starting an SMSF with a balance below $200,000 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, or
• 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. Costs associated with SMSFs include establishment, ongoing and wind-up expenses.  It’s important for the benefits of an SMSF to outweigh these 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.