How Much Money Do I Need For A Self Managed Super Fund

October 29, 2021    accountantinperth

The amount of money a trustee needs to start a self-managed superannuation fund is one of the most asked questions in Australia. To find the answer, the Australian Securities and Investments Commission (ASIC), the Australian Taxation Office, and the Productivity Commission have carried out research and discussions. Keeping in mind all the self-managed super fund rules, having a minimum of $500000 in super can be a good starting point. However, under specific circumstances, beginning with a smaller amount can be justified. This blog discusses the most crucial factors you will need to consider to start your SMSF.

A Cost-Benefit Analysis

An SMSF involves a vast range of investment fees and operating costs. As an owner of your self-managed super fund, you will want more benefits than the establishment costs, and therefore, it will be essential to do a cost-benefit analysis.

Establishment costs for the SMSF include:

  • Professional accounting and legal advice to set up the trust structure for your SMSF, and
  • Trust deed.

You also have to bear costs for the following services.

  • Financial statement preparation
  • Tax return filing and submission to the Australian Taxation Office
  • A compulsory annual SMSF supervisory levy payment to the Australian Taxation office
  • Fee for a corporate trustee (if application)
In addition to these payments, you should also have an annual audit of all the financial transactions. Make sure the audit process is carried out by an auditor who has valid approval by the ASIC because all fund activities should remain compliant with super legislation. Other costs associated with operating an SMSF include actuarial costs to figure out payments for the eligible fund members. You will also have to bear costs if you decide to wind up your SMSF. According to the SMSF withdrawal rules, this amount will depend on the wind-up process and the SMSF’s financial arrangements. As a trustee, you can reduce some costs by handling several administration duties yourself.

How Do SMSF Costs Compare?

Once you know the likely cost of an SMSF with your willingness and assets level, you can accurately compare your SMSF costs with other types of funds. A research had been carried out by an expert where he had examined the set-up and operational costs of SMSFs having different balances. Other parameters considered in the research included whether trustees outsourced only a part of their administration or the entire administration and whether the fund used low, high, or medium fee services.

The findings of the research are as follows.

  • Compared to industry or retail funds, SMSFs having a balance of $500000 or more were cheaper.
  • On the other hand, super funds with a $200000 or more balance provided equal value to an industry or retail funds at all administration levels.
  • Comparisons for SMSFs in the accumulation phase and those in the pension phase were similar. The same results were found when comparisons were drawn in cases of two-member and single-member SMSFs.
  • Multiple member SMSFs having a combination of pension and accumulation accounts were competitive with low balances like $100000. They were cheaper than funds with a balance of $150000, but only when trustees look after a large part of the administration.
  • But, SMSFs with balances less than $100000 were usually more expensive than industry or retail funds. The percentage of SMSFs having assets worth $100000 was 8.5% in 2019, which was much less than the figure in 2013.
SMSFs with balances less than $100000 can only be effective if they can be developed into a competitive size within a specific time. As we have seen, many SMSFs with low balances either grow in a quick time or work slowly in the drawdown phase and eventually get closed. A survey was conducted over more than 1800 funds with a $50000 or less balance at the beginning of 2017. By the end of 2019,
  • 40% of them had grown to a competitive size,
  • No change was observed in 33%, and
  • 27% of them had to close down operations.

The Huge Cost Of Direct Property

One of the advantages of having SMSF is that you can invest in direct property. But for that, you have to bear a high cost. According to analytical reports, it has been found that the median fees associated with SMSFs without direct property are competitive for fund balances of $200000 or more. On the other hand, high and median fees related to SMSFs with a direct property are much higher than the highest fees of industry and retail funds of all balance sizes. Let us explain it with an example.
  • In 2019, of the SMSFs having a balance of $500000, median fees for those without direct property were $3207. It was much less than the median fee of $9969 for funds that had direct property.
  • For the SMSFs having the same balance but high fees, the total fees were $15908 without direct property and $29799 with the direct property.
A higher amount of total fees is due to the higher investment and maintenance costs for a direct property and higher administration expenses required for accounting services. This is the reason you should do your cost-benefit analysis while setting up your SMSF. For some funds, investing in direct property may not be financially profitable. For others, specifically those with business property, holding a direct property in super may be beneficial if you compare it with the expense incurred in maintaining a property outside super.

Final Words

To conclude, SMSF costs are relatively higher for funds with lower balances and are less competitive with other super fund types. The general expenses include set-up costs, operational and withdrawal payments, and non-financial costs such as the number of hours you spend on management. It will be necessary for the benefits to be more compared to the incurred expenses. You may get in touch with Accountant Perth, who can assign you a top SMSF accountant to offer you the correct guidance.
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