Key Takeaways
- ASIC Benchmark: While the Australian Securities and Investments Commission (ASIC) suggests a minimum balance of $500,000 to be cost-effective, an SMSF may still be viable for lower balances if significant future contributions or specialized investment strategies are planned.
- Trustee Liability: In an SMSF, you are the trustee. This means you hold ultimate legal responsibility for all fund decisions and compliance. The ATO can apply heavy personal penalties for breaches of superannuation law.
- The Sole Purpose Test: Your fund must be maintained for the sole purpose of providing retirement benefits to members. Using fund assets for personal use or early access is strictly prohibited and carries severe consequences.
- Administration Costs: Running an SMSF involves fixed costs such as audits, tax returns, and ASIC fees. These costs remain relatively stable regardless of fund size, meaning larger balances benefit from a much lower percentage-based cost of administration.
- Impact on Benefits: Switching to an SMSF may result in the loss of existing insurance cover or specific benefit structures held within a retail or industry super fund. A thorough review of existing benefits is essential before making the move.
It seems Australians have been thinking more and more about the benefits of self-managed super funds (SMSFs) as they express concerns about their existing super fund in relation to transparency, liquidity and flexibility.
Despite the control, involvement and flexibility an SMSF can provide, there are a few things people need to consider before deciding if an SMSF is right for them. When considering SMSF advice, it is vital to look at the long-term commitment required.
Key Considerations for Potential SMSF Trustees
Ask yourself the following questions:
- Is the fund strictly for benefits in retirement? The fund must meet the Sole Purpose Test.
- Do you have the time to manage your own fund? Managing investments and compliance requires a significant time investment.
- Will the benefit be worth the cost? Administration and audit fees must be weighed against potential returns.
- How will switching to your own SMSF affect your current superannuation benefits? You may lose access to group life insurance or other legacy benefits.
Having your own super fund to manage may sound easy. However, as you are the trustee of your own fund you are ultimately responsible for every decision you make. You need to understand there are some things you simply cannot do within your SMSF. Professional financial planning can help ensure you stay compliant.
The regulator, the Australian Tax Office, will apply heavy penalties against trustees who break the law.
Minimum Balance Requirements and Cost Effectiveness
How much is enough? This has been a hotly debated issue since the inception of SMSFs. Different people have different ideas as to exactly how much is needed to set up an SMSF. ASIC has recommended at least $500,000 for an SMSF to be competitive with large funds.
It can be argued that people with less than this could easily manage their own SMSF, particularly if they are planning to make large contributions over time and/or have experience with investing. The issue, of course, is cost. To remain cost effective it is generally accepted that the greater the amount of funds pooled within the SMSF, the lower the cost average. Over the long term, as the SMSF account balance grows, the cost of running the fund becomes even more efficient.
Trustee Structure Cost Comparison
# Paul and Mary are using a Corporate Trustee structure, which means an additional $455 ASIC fee. Bill and Ellie are using an Individual Trustee structure, so the only cost is the SMSF Trust Deed. * The ongoing company fee is a reduced ASIC fee because Paul and Mary are using a shelf company as the corporate trustee, and not an existing company. A shelf company acts as the corporate trustee only and is not associated to any other entity activities. ^ Administration fees charged by Morgans Wealth+ SMSF Solutions service and includes annual audit fee. This is an indicative cost only as the actual fee will depend on the administration/accountant service used. ** Ongoing portfolio fee - estimated average Morgans' Wealth+ fee
Comparing Administrative Costs and Trustee Structures
In relation to costs, clearly size does matter. There is a significant difference in the ongoing costs for Bill and Ellie compared to Paul and Mary. Even where Paul and Mary incur additional costs due to the corporate trustee structure, their average costs as a percentage of their total balance are less than half of Bill and Ellie's.
If you would like to discuss whether a self-managed super fund is for you, or you would like to know more about what is involved in running your own SMSF, it is best to speak to a professional.
Find an SMSF Specialist
Running your own super fund gives you total control, but it also brings total responsibility. Our advisers can help you weigh the costs and determine if an SMSF fits your long-term retirement goals. Find a Morgans adviser today to discuss your superannuation options.
Frequently Asked Questions
How much super do I need to start an SMSF?
ASIC generally recommends a minimum balance of $500,000 to ensure the fund is cost-effective compared to industry or retail funds. However, you can start with less if you plan to increase the balance quickly through contributions or if you have a specific investment strategy that requires the SMSF structure.
What are the main responsibilities of an SMSF trustee?
As a trustee, you are legally responsible for managing the fund's investments, keeping accurate records, and ensuring the fund complies with all tax and super laws. You must also arrange an annual audit by an approved SMSF auditor and lodge an annual return with the ATO.
Is an SMSF cheaper than a regular super fund?
It depends on your balance. Because many SMSF costs are fixed (like audit and accounting fees), the fund becomes cheaper as a percentage of your total assets as the balance grows. For balances under $200,000, a regular super fund is often more cost-effective.
What happens if my SMSF breaches ATO rules?
The ATO can issue administrative penalties, which you must pay personally rather than from the fund. In serious cases, the ATO can disqualify you as a trustee, freeze the fund’s assets, or remove the fund’s complying status, which results in a significant tax penalty on the fund's total value.
Can I lose my insurance if I move to an SMSF?
Yes. When you close a retail or industry super account to fund an SMSF, any life or TPD insurance tied to that account is cancelled. It is important to secure alternative insurance within your SMSF before closing your old fund to ensure you remain covered.
