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Self-managed superannuation funds are often referred to as do it yourself funds or DIY Super. But how DIY can they really get? It it even possible to do everything yourself and if you were, how significant would the savings be?
If you are seeking to start up and run an SMSF for the lowest cost possible you will have to consider the investment of your time as this is where the real cost of ‘ultra’ DIY super lies. If you have the time, like investing and perhaps are a retired, or semi-retired, financial services professional, you could be able to save significant amounts by doing most things yourself.
But if you’re not that kind of investor, you need to weigh up the opportunity cost of spending your time on your SMSF. And also consider how confident you feel about important DIY documents standing up in court if you were ever challenged by a third party. There are significant penalties for making mistakes in running your SMSF so if you don’t have relevant experience, it may be best to pay money for some document templates rather than going it completely alone.
To run an SMSF as cheaply as possible, the key is to keep it as simple as possible. It would be best to avoid complex investments such as investing in real property and borrowing to invest in assets.
How you set it up will also dictate the cost. You can set up your SMSF with individual trustees or corporate trustees but if you use a corporate trustee structure the Australian Securities and Investments Commission (ASIC) will charge a fee to register a company for the first time (approximately $403).
There is an annual review fee but that will be lower (approximately $53 a year) if the company’s only purpose is to act as trustee for your SMSF.
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Every SMSF needs a trust deed to operate. It is a legal document and is required to set out the rules for how the fund will be established and operated. It needs to explain the fund’s objective and who can be a member. It needs to specify what kinds of investments the fund will invest in and how benefits will be paid in pension phase. The Australian Taxation Office (ATO) stipulates the following around trust deeds.
The trust deed must be:
- prepared by someone competent to do so as it’s a legal document
- signed and dated by all trustees
- properly executed according to state or territory laws
- regularly reviewed, and updated as necessary.
You can write your own trust deed but you need to be reasonably confident that what you are writing would stand up when tested by a third party.
There are a range of free templates available on the internet to help you and you can also buy cut price services – from around $150 to $250 – that will assist you to set up a basic trust deed. In the Northern Territory there may be stamp duty payable on the trust deed but this is nominal – $20 plus $5 for every subsequent copy of the deed. This is not payable in other states.
SMSF Supervisory levy
The ATO requires that SMSFs pay a supervisory levy every year. This now must be paid in advance. It is currently $259 but funds just starting up need to pay double in their first year – the levy for the year in which they register and a year in advance. This is part of your annual statement from the ATO.
You do need to pay a third party for your annual SMSF audit, which the ATO requires. The auditor must be registered with the Australian Securities and Investments Commission (ASIC) as an approved SMSF auditor. Check the ASIC’s database of approved SMSF auditors here.
The most recent data (collated by the ATO for 2016) has average annual auditor fees at $694 with the median auditor fee at $550. Audits for simple funds with 15 investments or less (no property and no loans) can be found for around $400.
Financial Statements and tax return
SMSFs need to provide an annual tax return to the ATO with the fund’s annual financial statement.
Like your personal income tax return, it is possible to complete your SMSF’s annual tax return yourself if your fund is not complex. The SMSF tax return form can be found on the ATO’s website here along with instructions on how to complete it.
A tax accountant could complete a simple SMSF tax return for between $700 to $1,000. The returns of more complex SMSFs would be more expensive.
Your fund is required by law to have an investment strategy that needs to take into account:
- The risk involved in making investments and their likely return;
- The overall composition of the fund’s investments and their diversification;
- Liquidity of the investments, in respect of the cash flow requirements of the different members; and
- The ability of the fund to discharge its existing and prospective liabilities.
An investment strategy can be a relatively simple DIY document and you can use our SuperGuide templates found here and included in the annual price of your SuperGuide subscription.
Once you have the investment strategy you need to invest and this is where you can incur big costs. The ATO reported that the average investment costs for SMSFs in 2015/2016 were $4,173 – an increase on the previous year’s average of $3,846.
It is possible to do it much cheaper if you have the time and knowledge to invest yourself. If you invest via an online broker, each trade could cost just 0.1% of the size of the trade – $50 for a parcel of $50,000 shares for example.
Investing in managed funds becomes more expensive with management expense ratios for actively managed funds of between 1-2%. SMSFs have traditionally used managed funds for asset classes where they may not have the scale – such as infrastructure and commercial real estate – or where they do not have knowledge, such as international equities or global fixed income.
The good news is that there is now an extensive range of exchange traded funds (ETFs) or listed investment companies and trust (LICs and LITs) available on the Australian Stock Exchange (ASX) that offer coverage of some of these asset classes. They still have management expense ratios but they are much cheaper than straight managed funds and are a good way to provide your SMSF with diversification. The outlaid cost is just the price of the ETF unit quoted on the ASX.
You could potentially get your investment costs down to between $500 and $1,000 per annum, or even lower, for a diversified portfolio of between 10 to 20 Australian equities and an extra 5 to 7 ETFs or LICs for diversification across international equities and other asset classes such as fixed income and infrastructure.
At the bottom of this article we list some SuperGuide articles where you can learn about the most popular investments for SMSFs:
Roboadvice is another option. This is totally automated advice based on a series of questions you answer around your attitude to risk and your investment needs. These services range in cost from 0.1% of assets to nearly 1%. Roboadvice providers will suggest an investment portfolio and manage and maintain that portfolio based on your investment objectives. But some of the more expensive Roboadvice options look a lot like model portfolios and charge fees like those of managed funds.
Administration platform provider
Many SMSFs use an administration platform provider, which keeps track of their assets, investments and superannuation contributions and can organise many of the services outlined above.
An administration provider can follow your SMSF’s tax liabilities and calculate how much of your superannuation is taxed or untaxed, which is useful when you retire and come to withdraw your superannuation or enter pension phase. These platform providers charge annual fees, which will differ depending on whether your fund is in accumulation or pension phase. Annual fees range from around $1,000 for the cut-price option to $3,000 or more. The cost of the more expensive platforms may include annual audit fees.
You can also keep track of your investments, income, contributions received etc. in an excel spreadsheet. For this to suffice, the simpler the structure of your SMSF the better.
Administration platform providers can also notify you of changes in regulations and rules and help you work out what, if anything, you need to do as a result. But you can keep on top of these things yourself, either by following the financial press or subscribing to services like SuperGuide. SMSFs are a growing and significant section of the superannuation industry and any regulation changes that affect SMSF trustees are promptly reported.
Total ultra-DIY costs
Assuming a corporate structure and that you pay $200 for a trust deed template, but complete your tax return yourself. Costs to set up and run your fund in the first year (excluding investment costs) would be around $1600. In subsequent years the annual administration cost could be as low as $800, again assuming you complete the tax return yourself and that the fund is in accumulation stage.
How does this compare to average costs? ASIC released a report in 2018 that estimated the average annual cost of administration and operating expenses for SMSFs 2015/2016 was $3,595.
Investment costs for a total DIY solution could be as low as $1,000 for a very simple fund in accumulation phase.
It is easy to get costs down if you are running a simple SMSF in accumulation phase but what happens if you want to start a pension or perhaps your fund is looking to borrow to invest in real property.
If your fund is in pension phase you will also have a transfer balance account and be required to do event-based reporting. Your transfer balance account is a record of events that count towards your transfer balance cap – currently $1.6 million. You cannot have more than this in a tax-free ‘retirement phase’ account.
If your SMSF is looking to borrow to invest (in property or other assets) you will need additional documentation to set up a bare trust and a loan agreement. Basic documentation packs can be obtained for around $880 for commercial lenders or twice as much for related party lenders. But this is the bare minimum and does not include fees charged by commercial lenders, which can vary greatly.
There is also extra documentation involved in setting up a pension in an SMSF (see SuperGuide article SMSFs: How to start a pension).
A trustee letter, product disclosure statement and pension payment agreement are required. An amendment to the trust deed could also be necessary. Assuming you could do some of this yourself – such as the trustee letter and trust deed amendment – basic templates for the other documents could cost between $500 to $700 in total.
If there are members in accumulation and pension phase, or a member receiving a pension but still making contributions, or a member with a pension that starts mid way through a financial year, and the assets are unsegregated, an actuarial certificate will be required. Budget actuarial certificates can be obtained for less than $200 but you do need one every year.
Actuarial certificates are also required if an SMSF has a retirement phase income and any member has a balance over $1.6 million in their superannuation fund. These kinds of actuarial certificates are more complex and therefore more expensive.
Another additional cost, which we can thank the introduction of transfer balance caps and accounts for, is the requirement for event-based reporting around events that have the potential to impact your balance.
Funds paying a pension with balances of less than $1 million will now be required to do this annually, at the same time the fund’s tax return is lodged. However, for funds paying a pension with balances of more than $1 million they will be required to report the event within 28 days of the end of the quarter in which the event occurred. This is done via a transfer balance account report and you can lodge these forms yourself via the ATO’s portal potentially saving money but not saving time.