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If you want to take charge of your superannuation and save for a more comfortable retirement, starting an SMSF may be the solution. However, before choosing the SMSF route, it’s important to not only be aware of the time and effort need to manage your investments but also the costs involved when doing it yourself.
Let’s take a closer look at how much it costs to run an SMSF and how much money you need to invest to make it a viable option for your retirement savings.
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A SMSF is a private superannuation fund, designed to help you save for retirement, that you manage and control yourself. SMSFs can have a maximum of four members. The members of an SMSF are usually also its trustees, allowing them to run the fund for their own benefit. This means you’re responsible for all decisions relating to the fund and for ensuring that you comply with all laws and tax requirements.
When you run your own SMSF you need to be able to make investment decisions that align with your financial needs for retirement. This means you’ll need the necessary financial knowledge and skills to make the right decisions, as well as manage a range of legal obligations.
But while an SMSF can be ideal if you want to take control of saving for your retirement, there are significant establishment and running costs to contend with. It’s vital that you are fully aware of these costs before deciding whether an SMSF is right for you.
There are a range of costs associated with setting up and running an SMSF. These costs can be broadly separated into three categories: establishment costs, operating costs and investment management costs.
If you wish to run an SMSF you will first need to formally establish the fund. This involves obtaining a trust deed, appointing a trustee and signing the trustee declaration. According to a 2013 report from Rice Warner, these setup costs can range from $345 up to $990.
However, if you choose the commonly recommended option of using a corporate trustee, where all members of the SMSF are directors of the corporate trustee, covering the resulting Australian Securities and Investment Commission (ASIC) and service provider fees can see establishment costs balloon out to anywhere between $916 and $2,035.
Just like any other super fund, there are costs associated with running an SMSF. These include the expenses associated with investing and taking care of auditing and accounting requirements for your SMSF, and you need to remember that these costs will eat into your retirement savings.
Ongoing operating costs for your SMSF include:
Some of these fees can vary widely based on the complexity of your SMSF and the costs charged by third-party providers (accountants, law firms etc.) that you hire to help ensure you comply with all ATO obligations. You can also choose between full-service providers, which take care of all the fund administration for you, or doing some of the administration yourself.
According to the Rice Warner report mentioned above, the annual operating costs of an SMSF in the accumulation phase can range from $1,163 to $2,367. However, if your SMSF provides a pension, this figure can rise as high as $2,957 per year, while if you opt for a full administration service costs can top the $8,000 mark.
SMSFs also use managed funds for a small portion of their investments, so the third cost you need to contend with is investment management fees. These expenses vary depending on the size of your investment in managed funds, but for SMSFs with a balance of $500,000, the Rice Warner report calculated annual investment management costs of between $208 and $714.
In December 2016, the ATO released its SMSFs: A statistical overview: 2014–15 report. The report revealed that the average total annual expense ratio of Australian SMSFs is 1.10%. With the average SMSF balance at $1.12 million, that’s an average annual cost of $12,200.
The table below, produced from ATO data, shows how SMSF expense ratios have changed over the past five years. The rise in expenses in 2013 reflects the fact that the ATO began including in its calculations the expenses that SMSFs in the pension phase are unable to claim as tax deductions.
| 2011 | 2012 | 2013 | 2014 | 2015 | |
|---|---|---|---|---|---|
| Administration and operating expense ratio | 0.32% | 0.32% | 0.51% | 0.52% | 0.50% |
| Investment expense ratio | 0.31% | 0.35% | 0.55% | 0.58% | 0.60% |
| Total expense ratio | 0.63% | 0.67% | 1.06% | 1.10% | 1.10% |
The report also revealed a few other interesting statistics:
So what exactly do all these numbers mean? When deciding whether or not to establish an SMSF, the size of your investment matters. The simple fact is that many of the costs associated with running an SMSF are fixed expenses, so they remain exactly the same regardless of whether you have a balance of $50,000 or $2 million. These include costs such as the ATO supervisory levy, audit fees, accounting fees, and the cost of lodging tax returns with the ATO.
To illustrate this point, the ATO’s SMSFs: A statistical overview: 2014–15 report revealed that SMSFs with balances of under $50,000 had average operating expense ratios of 12.55%, while those SMSFs with balances between $500,000 and $1 million had operating cost ratios of 1.43%. The larger your SMSF balance, the less effect your annual operating expenses will have on its bottom line.
With this in mind, it’s important to calculate how large your investment amount should be in order to make establishing an SMSF a cost-effective proposition. In its 2013 report, Rice Warner crunched the numbers to determine the minimum cost-effective balance for an SMSF and produced the following findings.
To sum up, the report found that you would need a balance of at least $200,000 to $250,000 if you’re willing to do some of the administration yourself, while if you opt for full-service administration, this only becomes cost-effective when you have a balance of $500,000 or more.
Of course, operating costs can sometimes vary substantially from one SMSF to the next, so it’s important that you fully understand all the potential expenses involved before deciding whether an SMSF is the right choice for you.
Yes. Many of the setup, admin and ongoing operating expenses paid by your SMSF are tax deductible with the ATO. Any tax deductions you claim for your SMSF need to relate to your assessable SMSF income (not your personal income). Here's some common expenses that your SMSF may be able to claim as a tax deduction:
You generally need to claim the expense as a tax deduction in the financial year that you incurred the expense. Like your personal tax return, SMSF trustees will need proof of receipts for the expenses they wish to claim. Any receipts that are in the name of an individual trustee rather than the SMSF's name generally cannot be claimed as a deduction. If an expense needs to be split between a personal expense and an SMSF expense, your tax agent can help with this.
Getting assistance from a qualified tax professional is a safe way to ensure that you're claiming all relevant SMSF expenses as tax deductions and not making any errors in the process. Compare tax agents across Australia below.
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