A self-managed super fund is a surefire way of gaining greater control over your investments. It also offers you more flexibility (till the time you abide to your investment strategy). This said, there are various responsibilities on the shoulders of an SMSF trustee, and what’s more, you must tick many right boxes before entering into the SMSF space. Let us find out if the SMSF is for you; if yes then why and if not, then what may be the single biggest reason hindering you. Read along.
How much can an SMSF setup cost?
For justifying the costs associated with an SMSF, you need to have a fairly decent amount in the kitty. However, the perception regarding “what’s enough?” has changed with time. Today, the administrative costs have shrunk and so have the other fees related to managing the SMSF (this can be put down to stiff competition among providers) so the gospel, “you need a minimum of $200,000 to form an SMSF” may not hold true. However, it is just as true that you can’t begin with next to nothing. You definitely need some money up your sleeve.
SMSF fees: A break up of operating costs
Let us break the cost of setting up and managing the self-managed Super fund to make matters clearer for you. Apart from the establishment cost- which has come down- you need an operating cost for the SMSF venture. This has also come down considerably over the last decade. In the year 2008, you needed something like $6389 on an average to manage the ‘selfie’ but in the year 2010, all you needed was $4840 to operate your SMSF.
SMSF trust deed makes a part of the associated costs of SMSF
There are certain fixed costs associated with SMSF. These may include, but are certainly not limited to costs catering to preparation of annual report, audit report and trust deed. The whole grind of investment, accounting and subsequent auditing needs more money for managing the SMSF show, compared to, let’s say, some of the other Super funds.
There can be certain contingency expenses but without going into them, it is important to prefigure additional costs that are not marked as contingency but occur nevertheless. I intend to call them occupation hazards. Such expenses include costs pertaining to legal and monetary advice, procurement of actuarial certificate, valuation of SMSF assets, and insurance.
The average cost of maintaining an SMSF is close to 1% (a shade less than 1%). The reason why $200,000 is taken as an industry standard is because it is widely believed that you need something like $2,000 to maintain your SMSF and when you think of $2,000 as 1%, the total fund value comes close to $200,000.
This said, we have discussed above that the cost of administration and maintenance has considerably shrunk. So, if you are looking at $1,200 instead of $2,000, you can well make out that all you may need to set up your SMSF is $120,000 and not $200,000 as is the popular consensus.
Self-managed Super fund set up: Operating Expense Ratio
Another notable point is that the operating expense ratio (OER is taken as 1.03%) reduces as you keep going up the ladder of fund value. To give an example, you may need 1.03% for a $200,000 self-managed Super fund and only 0.80% for $500,000 and perhaps 0.60% for $800,000 self-managed Super fund.
When you are seeking an SMSF provider, there are certain questions you must ask them. It is what we term as conducting Due Diligence before hiring. Ideally, it is important to get a hang of the establishment costs, running costs, costs not mentioned in the quotes and cost of advice.
The last word on costs- while you can set up your SMSF for a considerably reduced price than what is taken for the industry standard, your SMSF may only be cost effective if you have something more than $300,000 in the kitty.
Another very crucial component of making the ‘SMSF’ decision is whether you have the time in hand to make SMSF the chosen investment vehicle for you. And why do I need time, you may ask? As a first, you will have to keep a consistent tab on your investment strategy and at best of times, this can be a time consuming job. You also need to clear your reporting obligations before deadlines whoosh past you.
The ATO has become very strict and contraventions can result in getting yourself a bad name. The SMSF is a dynamic world and there are constant updations. Unless you are aware of the constant changes, you may fall short of performing your responsibility as a trustee. You cannot of course keep everything in sight unless you spare time for making the effort.
While thinking of how to set up SMSF, remember the importance of your investment strategy
It is needless to say that your investment strategy is the key mantra. There may be dozens of investment strategies waiting to be unlocked by you but a thorough research into them asks for your quality time. So, it is not hard to discern that SMSF is a venture for you only if you have got the time to keep tab of it.
While it is true that you can seek professional help in every way, it is also just as true that most of the time this kind of help does not bear much fruit unless you pour in your personal hours. Not without a reason is it called ‘self-managed’, after all? Talking of professional help, you can rope in lawyers, auditors, financial advisers, accountants, fund administrators and registered tax agents for the purpose of managing your SMSF. Let us take a glance at what these professionals can do for you.
Professionals who can help you set up SMSF for you
- SMSF auditors- self managed Super fund auditors prepare the annual audit report of your fund. As a rule, they must be registered with the Australian Securities and Investments Commission (ASIC).
- Fund administrators- they operate your fund on a daily basis. However, if there is any discrepancy in the fund or it bypasses compliance it is you who would be held responsible for such actions of the fund.
- Accountants- they prepare statements and financial reports.
- Tax agents- they are responsible for the lodgement of your fund’s annual returns.
- Financial planners- they indulge in your wealth planning or financial planning.
- Qualified actuaries- in the event of making pension payments to the members, you may need an actuarial certificate. This is provided by a qualified actuary.
- Investment managers- these professionals help you select your investments based on your declared investment strategy.
- Legal specialists- these are the go-to professionals when an intricate legal issues arises.
To reiterate, you may need all the time in the world to manage your SMSF, the presence of all the professionals notwithstanding.
SMSF setup: Sole Purpose Test
In Australia, the Superannuation laws govern that any Super fund that you choose- and it includes SMSF, of course- needs to adhere to the Sole Purpose Test. To define, Sole Purpose Test means that you are indulging in a Super fund for the sole motive of preparing yourself for a better retirement. The fund is meant to benefit you and help negotiate the retirement stretch. In the same way, it is expected to benefit your dependents should you pass away.
Self managed super fund rules for becoming a trustee
For becoming an SMSF trustee, you need to be above the age of 18. It is worth noting that you can still be a member if you are not 18 but for being a trustee, you need to be a minimum of 18 years old. Apart from this criterion, the other qualifications you must clear are:
- You should not be an undischarged bankrupt
- You should not have criminal bearings
- You should not be mentally unsound
- You should not have a Civil Penalty Order in your name under the SIS Act 1993.
- You should not be declared unfit and improper under section 120A(3) of the SIS Act 1993.
Other SMSF rules you must adhere to
As an aside, you must also prefigure certain aspects of SMSF if you plan to travel frequently or manage your fund from overseas. As a rule, your SMSF must have been established in Australia. The central management of the fund must be in the hands of trustees living in Australia. While this clause can by bypassed, certain protocols must be observed for doing so. Also, it is mandatory for the residents of Australia to hold as much as 50% of the SMSF assets.
How to set up a self-managed super fund: if you are individual or a company
As a first, you have to make up your mind whether you want individuals as trustees or a company. Getting thorough knowledge of the task at hand may help you determine your way ahead. To begin, you need to establish a company if you want your company to be a trustee. It is a cost-inclusive mission. No such expense is required if you are looking at individual trustees.
For “individuals as trustees”, you need at least two trustees and one replacement trustee should the need arise because of the demise or disability or divorce of a trustee. For “company as trustee” the change of membership takes effect in a different way. Trustees, in such cases, can operate as a sole director company and even bring in new directors without effecting any name change on the investment holdings.
Similarly, when companies act as trustees, it requires less administrative changes when a member or a trustee quits the fund. This is because the records of investment remains largely unaltered. The same cannot be said about the event when individuals operate as trustees.
There is no shortage of benefits with SMSF and we are just about to discuss them. However, SMSF is a financial space that lacks prudential regulations and hence it is important not to be drawn into audit contravention. The new penalty regime of the ATO is pretty harsh on such trespasses.
The ATO believes that many of the SMSF trustees need to be educated and hence they conduct webinars and offer various other avenues of passing information but it also feels that the trustees should come out in the open and acknowledge mistakes and not sit back and feel reassured about the ATO’s leniency. Because if anything, the ATO is not going to be lenient with contraventions.
Benefits of setting up an SMSF
- The SMSF sector offers far greater control over our investments.
- It offers greater flexibility and till the time you are adhering to your declared investment strategy you can tweak and turn your investments as you like.
- You can invest in shares and the property market by using your fund’s money and you can borrow against it via limited recourse borrowing arrangements, too.
- You can make SMSF the perfect family fund for you. You can be a trustee and ask up to 3 more family members to be the same. You can minimise costs of operating the fund and plan your estate more effectively by allocating fund members prudently.
- You can facilitate greater tax savings by just being a little diligent about certain tax events. For instance, you can bypass capital gains tax while earning pension at a time your fund moves from the accumulation phase to the pension phase.
- Through a Binding Death Benefit Nomination you can ensure in advance whom your estate is passed on to in the event of your death or permanent disability.
All this said, it needs more than a passing mention that you need to be careful while borrowing or indulging in related party transactions. It is beyond the scope of the present article to discuss these aspects. I have already spoken in detail about limited recourse borrowing and its impact on SMSF and also on related party transactions and arm’s length transactions in some of my recent articles.
Disadvantages of setting up SMSF
On the other spectrum lie a few disadvantages of managing an SMSF, too. Here are some of them:
- If you bypass compliance, the ATO might pick you and the best that can happen is that you will get fined (heavily or leniently). Worse that may happen is that you will suffer serious tax consequences and worst possibility is that you will get disqualified and debarred from being an SMSF member. Your fund faces similar fate. Of course, you may also get imprisoned for certain contraventions.
- The costs associated with buying insurance within your SMSF may be higher than it would take to buy insurance within other Super funds. If you have age issues or health issues to cope up with, SMSF may subject you to very high premiums.
- There can be only up to four members for a SMSF. And all of them must be engaged in the operation of the fund. Put another way, this implies that each of them have to clock in individual log in hours in a way.
- If you do not give SMSF the time it deserves or make decisions without considering your risk profile, you may hit a wall with your fund’s investments. The same may happen if you put your money into poor financial products.
- The SMSF sector lacks prudential regulation and hence you are not offered statutory compensation in the event of fraud or theft. In cases of disputes, you cannot reach out to the Superannuation Complaints Tribunal. You can take the judicial route but only at your own expense.
Before wrapping up, it is time to state once again that SMSF may not be the right venture for you but if you are thinking about it, it means that you have won half the battle already, at least you have given consent to putting in time in the venture (or else why would you think about it, you know what the term ‘self-managed’ implies, right?)
SMSF compliance is the most crucial aspect of its management
Just make sure that amidst all the other things mentioned above, you are also smart enough not to make some of the easily-committed mistakes. Trespassing contribution caps, not paying right pension in the pension accounts, not enrolling for the SMSF Trustee Education Program, breaching in-house asset rules, not furnishing relevant documents are only some of these mistakes.
As an SMSF investor, you will be more than eager not to step across the line. Sometimes, the dividing line between compliance and non-compliance may be wafer thin. It is wise to seek professional help. If there is anything about SMSF compliance that you want to know in greater detail, feel free to join me. I will be glad to help.