![Picture by Shutterstock Picture by Shutterstock](/images/transform/v1/crop/frm/nyJNdbYwrvs4ar4apYrpG8/d3d88f3c-a946-4e23-85f7-2e36961545ef.jpg/r0_0_1000_655_w1200_h678_fmax.jpg)
This is branded content by eToro.
Subscribe now for unlimited access.
or signup to continue reading
According to ATO data, the number of Self-Managed Super Funds (SMSFs) has steadily increased in recent times.
Despite having certain tax deductions available, the costs of running an SMSF are not well understood.
There are also key considerations to be made if you are planning on creating one.
Key takeaways:
- An SMSF is a privately operated super fund that can be used to invest in assets like property and physical objects such as gold, cryptocurrencies, and stocks.
- In 2021 - 2022, the median and average ongoing costs of running an SMSF in Australia were $4,236 and $6,872, respectively.
- The total expense ratio for smaller funds is higher than for larger ones, making high-value SMSFs more economical to operate.
What is a self-managed super fund?
An SMSF is a self-managed super fund built to provide retirement funds. It is unique to super funds offered by industry and retail providers since it is owned and operated by its members and Trustees.
This means the fund is wholly responsible for ensuring it complies with all super and tax regulations. Non-compliance with regulatory requirements represents one of the largest risks to SMSF investors.
Compared to other types of superannuation funds, members of an SMSF are also considered Trustees. As the Trustee, you are responsible for making investment decisions that benefit all Trustees financially.
Related story: Our top picks for the best share trading platforms in Australia.
The ongoing costs to run an SMSF
Ongoing costs play a large part in how cost-effective an SMSF can be over the long term.
ATO data shows these are the median costs for 2021 - 2022.
- Interest expenses (within Australia) - $11,313
- Interest expenses (overseas) - $7,958
- Insurance premiums - $5,928
- SMSF auditor fee - $549
- Investment expenses - $6,831
- Management and admin expenses - $3,039
- Forestry-managed investment scheme - $1,968
- Supervisory levy - $259
- Other deductions - $314
However, some of these costs may not apply to every SMSF.
As a guide, the same report indicated that the median and average ongoing costs for an SMSF were $4236 and $6872, respectively. It is also noteworthy that ongoing costs steadily increased from previous years, where the median and average in 2017 - 2018 were $3836 and $6040, respectively.
But the degree of ongoing costs also heavily depends on the fund size. The larger the fund, the higher the costs associated with it. Although ongoing costs increase with a larger fund, the cost-effectiveness improves.
In the $0 to $50,000 asset range, the average total expense ratio was 17 per cent, with average expenses being $4200 and median expenses being $2200. For SMSF funds valued over $10 million, the average total expense ratio was 0.6 per cent, but average expenses were $97,000 and median expenses were $41,100.
The benefits of an SMSF
An SMSF is attractive for a variety of reasons. Here are some of them.
- There are many more investment options than standard superannuation funds. For example, art, property, international shares, cryptocurrencies, and commodities like gold can be considered and included in the investment strategy. This is a particularly good option for savvy investors who can think outside the box.
- They can be a pathway to property investments. Investors who are interested in gaining capital growth have the option of getting into the residential or commercial real estate market.
- You have more control over your super. Since it's self-managed, you can control and decide on your retirement funds. You have many more options and can ensure they align with your long-term financial goals.
- Although you can do this to some extent with a standard superannuation fund, an SMSF allows you to customise the fund to your personal risk tolerance.
- Being in direct control allows you to modify your investments immediately in reaction to market changes. This flexibility might help minimise losses during market downturns or capitalise on new possibilities.
- Individuals with substantial superannuation balances may find that the fixed costs associated with SMSFs are relatively lower than those of traditional superannuation funds. This can result in potential savings as traditional funds often charge fees based on a percentage of assets.
- In an SMSF, you can designate particular beneficiaries and determine how benefits are distributed, whether as a lump sum or via a reversionary pension. This adaptability guarantees that your superannuation is allocated according to your preferences.
- Australia's self-managed superannuation funds enjoy advantages from the country's tax system, as the tax on superannuation earnings is lower compared to personal income. This feature makes SMSFs a powerful method for accumulating and safeguarding wealth.
- Over time, an SMSF can offer substantial tax benefits because the income generated within it is usually taxed at a rate of 15 per cent, and capital gains on assets held for more than a year are taxed at a reduced rate of 10 per cent.
Cons of SMSFs
The main con of SMSFs is that you need to maintain them yourself (and your trustees). But there are other considerations.
- Management of an SMSF can be challenging and entails many obligations. Trustees are obliged to maintain thorough records and ensure that all applicable requirements are followed.
- All trustees must be aware of the ever-changing regulatory landscape and all requirements that must be adhered to. This is to ensure that the fund operates within the rules set by the ATO.
- You need to have the fund audited and submit reports to the ATO on an annual basis. This includes creating financial statements, keeping track of transactions, and making sure all investments abide by superannuation regulations. You can engage someone to do this for you to make it easier.
- Smaller SMSF funds are not cost-effective. SMSFs can be expensive to set up, so having a larger starting balance makes more economic sense.
- Many SMSF trustees turn to experts to manage their funds efficiently, which can come at a hefty cost. These costs include legal counsel, accounting services, and financial guidance.
- Since you must be across all aspects of an SMSF, it can demand a significant time commitment to operate. Trustees oversee all administrative duties, monitor regulatory developments, and conduct regular performance reviews of their fund.
- Breaking SMSF rules may result in serious consequences, such as fines and trustee disqualification. Careful fund management and a solid grasp of superannuation regulations are necessary to ensure compliance.
The three key criteria for an SMSF
For an Australian SMSF to be valid, it must meet these key criteria.
1 - At least one asset must be located in Australia
At least one, if not all, of the invested assets must be located in Australia. However, the fund can be assessed as established in Australia if its initial contribution was funded and paid in Australia.
2 - The management party must be in Australia
The central management party of an SMSF cannot be located outside of Australia. Members who reside in Australia must make all of the high-level strategic and managerial decisions regarding the SMSF.
These decisions include the investment strategy, reviewing the fund's performance, and determining the proportion of assets allocated as member benefits.
However, there is a nuance to this. If central management is required to be located outside of Australia, then the SMSF is still valid as long as the residence period is no longer than two years.
3 - Members must be Australian residents
Trust members must be Australian residents who hold at least 50 per cent of the total market value of the fund's assets or the sum of payments payable to that member if they decide to leave the fund. The trust is void if this criteria is not satisfied.
How to set up an SMSF
1 - Get professional advice first
Professional advice is highly recommended when setting up your SMSF to ensure you make the fewest mistakes possible, which can cause unnecessary headaches.
Not only will you be informed about the process and its nuances, but you might also need their services to ensure it's done properly.
Developing a sound strategy that works for you is important, and a financial advisor specialising in this area will be paramount. They can help you understand the different types of investment assets and available insurance products.
Your accountant should provide professional advice to help you establish the right funding system. If you don't want to manage the day-to-day responsibilities, a fund manager might be a worthwhile consideration.
Apart from those, a legal practitioner will need to prepare the trust deed (and update it in the future, if needed), and an approved SMSF auditor will need to audit your fund.
2 - Choose the trustee
Depending on the type of SMSF, the trustee can be an individual or a corporate entity. The assets of an SMSF with an individual trustee structure are registered in the names of the individual trustees and the fund members.
On the other hand, with a corporate trustee arrangement, the members of the SMSF serve as directors, and the assets are registered under a business that serves as the trustee.
It should be noted that differing responsibilities and limitations exist under each type of arrangement, and they should be understood.
3 - Create the trust and trust deed
To prepare a trust, the following are needed:
- Trustees or directors of a corporate trustee.
- A trust deed that outlines the governing rules for the fund.
- Assets.
- Identifiable members
A legal document known as the trust deed specifies all of the fund's members and describes the guidelines for its management.
It must be prepared by an accountant, administrator, or tax agent who will ensure that each SMSF member signs and dates it.
Another document that outlines the obligations of every trustee as set forth by the ATO is the trustee statement.
4 - Register the SMSF and get an ABN
After the trust deed is signed by all its members, the fund must be registered with the Australian Tax Office (ATO) and an ABN set up within 60 days. This is a relatively straightforward process, but there are a few things to note.
When applying for an ABN, a tax file number must be requested from the ATO and registered for GST, if applicable. The fund will also need to be assigned as an ATO-regulated SMSF. Otherwise, eligible members won't be able to receive any tax concessions.
5 - Open a bank account in the trust's name
A bank account unique to the SMSF will be required to store and accept monetary contributions (including super rollovers and income from investments) to the fund.
To demonstrate the separation of assets, the bank account cannot be linked or associated with any personal bank accounts of its members.
6 - Set up an electronic transfer address
If part or all of the fund's strategy is to receive ongoing contributions from employers, an electronic SuperStream needs to be set up. This will ensure successful payments, including rollovers from other super funds.
7 - Prepare an exit strategy
Often an afterthought, developing an exit strategy for unexpected events is important. For example, if a member passes away or if there is a relationship breakdown between the trustees, having a plan to account for and mitigate this can reduce the impact.
To facilitate this process, the exit strategy should rely on good record-keeping by all trustees throughout the fund's life.
Essentially, the plan should revolve around rules that provide a guidance framework when triggers are realised. This might even include the appointment of a power of attorney.
Disclaimer: This information is general and is for educational purposes only. This story is general in nature and does it take into account your financial situation. Investors should obtain professional advice from an independent financial advisor where appropriate and make your enquiries.