Self Managed Super Fund Costs

Previously, financial regulator ASIC had estimated that SMSFs had an average annual running cost of $13,900 and required a minimum balance of $500,000 to make them worthwhile.

However, these figures were a bone of contention among advisors, and after industry feedback, ASIC removed its guidance about a minimum balance in 2022. However, it cautions that ATO data does show that “fund expenses are proportionally higher, and net returns lower, for lower balance funds.”

• Australian Tax Office (ATO) data, from a statistical overview of SMSF’s tax returns from 2021-22 reveals:
• Average annual operating expenses were $6,872, with a median of $4,236.
• Average total expenses of funds over the financial year were $16,314, with a median of $9,104.

This equates to an average expense ratio of 0.5% for operating costs and 1.1% for total expenses.

Lisa Papachristoforos cites research from the University of Adelaide commissioned by the SMSF Association that found there was no material difference in the performance of self-managed funds with balances between $200,000 and $500,000.

She said that if you were expecting a financial boost in the short-term—say, through an expected inheritance or large amount of employer contributions—that could be a reason to start an SMSF with a smaller balance.

“But generally, you’d want to have a bit more under your belt when starting it because again, the economies of scale and fees kick in, and as a percentage are quite high when there’s a lower balance,” she tells Forbes Advisor.

Papachristoforos said SMSF establishment costs can be overlooked, and people were often surprised by the amount of work required upfront. She said it was important to engage experts like lawyers and financial advisors to prepare documentation like binding death benefit nominations, a trust deed, and an investment strategy.

“One-off expenses to think about are the deed of the self-managed super fund and the type of trustee structure you’re going to have, so whether it’s going to be individual trustees or a corporate trustee,” Papachristoforos says.

“That’s where you’re really setting the foundation and you’re setting the scene for everything else that follows on, so if you’re not getting the proper advice at the start, it does make things more difficult in the future.”

At a minimum, you might expect to pay $1,000 to establish the trust, and $3,500 for financial advice

Annual costs you can’t avoid include:

• An auditor’s fee, which typically costs around $600. You’re required to appoint an auditor to examine your financial statements and assess your compliance with super law.
• The SMSF Supervisory Levy charged by the ATO. For a newly-registered fund it’s $518 the first year and then $259 each subsequent year.

If your SMSF is in the accumulation phase (pre-retirement), many expenses associated with managing your fund are tax deductible. But poor administration of your fund can reduce its tax-effectiveness.

Papachristoforos says the three main year-to-year costs that SMSFs usually outsourced included the preparation of their financial statements, their annual tax return, and their annual audit.

She says the costs of accounting, tax specialists and auditors will depend on which assets are held by your self-managed super fund and the size and experience of the service providers you choose.

“If you’ve got a lot of unlisted investments, you’re going to find it much more expensive compared to if it’s just in cash.”

Your level of involvement in managing investments will also affect costs, such as whether you do-it-yourself through a share trading app or engage a financial planner to execute trades.

The median cost of common annual expenses, based on 2020-21 ATO data includes:

Paying commercial market rates for services—even if you’re a professional accountant—also helps you stay in line with the ATO’s ‘arm’s length’ rules. You’ll pay a higher rate of tax on your fund’s income if the expenses incurred in deriving the income are “less than, including nil expenses, what the SMSF would otherwise have been expected to incur if the parties were dealing on an arm’s length basis”.

Professional help can also reduce time spent managing your fund (and therefore, the opportunity cost), according to Papachristoforos.

“When you’re looking at day-to-day work that a member needs to do, it’s very little apart from making sure everything is where it should be,” Papachristoforos says.

Regular tasks may include processing and documenting payments and other transactions related to the fund’s operation, and ensuring ATO lodgements are made on time—such as PAYG withholding, GST, and your fund’s tax return.

“So, making sure that your accountant has information to prepare the financials and the tax return, and that they can communicate in a timely manner with the auditors, so that the member of the super fund can sign-off and get that lodged by the due date,” Papachristoforos adds.

No matter who does the work, an SMSF’s trustees should all be aware of what’s taking place, to ensure there’s no fraud or misallocated money.

“At the end of the day, it’s the trustees that have the legal responsibility to hold that money beneficially for the members. So they have a fiduciary duty to ensure that all the T’s are crossed and the I’s are dotted,” she says.

While the tax office looks favourably on people who identify breaches and rectify them promptly, there can be costs associated with non-compliance with SMSF laws. This includes cash fines of between $1,500 to $18,000 per trustee, and potential civil or criminal penalties.

The ATO recommends all SMSFs create an exit plan to make it easier to deal with the decisions and costs that come with eventually winding up a fund.

Key reasons funds close include the death of a member, when a retiree wants to convert all their super into personal assets, or when running a self-managed fund is no longer cost-effective.

“If they’ve taken out large amounts to fund their retirement, it might get to a point where it’s just easier and cheaper for them to do it through an industry super fund,” Papachristoforos said.

When closing an SMSF, costs involved will include:

• Paying any outstanding expenses such as bills for services;
• Costs incurred from the sale of all the fund’s assets;
• Outstanding tax liabilities; and
• Paying for a final audit.

Papachristoforos says you’ll likely need a higher level of support from your accountant or SMSF tax agent due to short timeframes and attention to detail required to report member benefits and lodge the fund’s final tax return. She warns it can be a costly and painful process.

“The reason why I say it’s painful is because you need to make sure that the tax liability is calculated correctly,” she says.

“If you’re doing it mid-year or any time that’s not 30 June, it’s very hard to get an evaluation of everything and get everything done, because you don’t really know the tax outcome.”

Papachristoforos says anyone considering an SMSF should do extensive research beforehand.

“The ATO has an amazing library of information. It should be your first port of call, in terms of research,” she notes.

Getting advice that fully considers your needs can help you control expenses by ensuring you make good investment choices, avoid speculative investing, and factor in important costs like insurance.

“If in doubt, you should always speak to a licensed financial advisor to make sure because they are in the best position to look at whether it is appropriate for you,” she says.

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