How much super do you need to set up an SMSF?

It's debatable how much cash you need in super to make starting your own self-managed super fund (SMSF) worthwhile.

The Australian Taxation Office (ATO), the Australian Securities and Investments Commission (ASIC), and the Productivity Commission have all engaged in extensive discussion and study over the years, but no definitive solutions have emerged. There is only general agreement that starting with at least $500,000 in super is a reasonable benchmark, while in some cases, starting with less may be acceptable.

A thorough survey of more than 100,000 SMSFs conducted by Rice Warner for the SMSF Association confirmed this consensus. But its paper, Cost of managing SMSFs 2020, went further, making some unexpected comparisons between SMSFs of various sizes and levels of complexity and retail and super funds.

For you to make an informed choice, we'll provide you with the most recent data and viewpoints on this contentious topic in this article.

Cost-benefit evaluation

The lack of a split of one-time setup fees and ongoing expenditures related to running your SMSF was one of the problems that threw off prior attempts to estimate costs. This meant that the average for all funds was only distorted by set-up expenses incurred in a single year. The scope and complexity of SMSFs themselves are reflected in the vast range of investing fees and other costs.

Nevertheless, the advantages must well outweigh these drawbacks. If not, you might be better off in a public fund where the costs of your time and money are reduced. But it's crucial to compare like with like when performing your cost-benefit analysis.

The establishment of the trust structure and trust deed for the SMSF is included in the setup charges.

Ongoing expenses for the reports and services needed to comply with the regulation include:

  • the process of preparing financial statements
  • the process of preparing and sending a tax return to the ATO
  • the obligation to pay the ATO a yearly SMSF supervisory levy
  • a charge for corporate trustees (if applicable)
  • a yearly examination of all financial documents. To make sure that all fund activities are completely in compliance with super regulations, an ASIC-approved auditor must conduct this audit.
  • To calculate eligible member pension payments, an SMSF may further be required to pay actuarial fees.

While trustees cannot completely avoid these recurring expenses, they can cut costs by managing portions of the fund's management themselves.

Optional expenses include the cost of expert investment advice or management services (if fund trustees choose to hire them).

And that's not the end of it. Additionally, there are expenses involved in winding up an SMSF. The sum will vary according to how intricate your SMSF's financial arrangements and wind-up procedure are.

What are the costs for SMSFs?

You can more effectively compare an SMSF to other types of funds on a like-for-like basis after you have a better idea of what an SMSF is likely to cost someone with your level of assets and desire, or lack thereof, to carry out some of the administration.

In order to achieve this, Rice Warner looked into the costs associated with the creation and maintenance of SMSFs with various balances, the extent to which trustees outsource all or just their compliance management, and whether funds utilize low, medium, or high fee services.

The table below displays the fee range for SMSFs with a range of balance sizes. Shaded areas indicate whether the fees are above, within, or below the fee range for retail and industry super funds with comparable proportions.

It should be noted that because the fees are fund-level expenses, they won't change depending on how many members the SMSF has.

SMSFs are typically less expensive than retail or industrial funds when they have balances of $500,000 or more. The only conclusion from Rice Warner's earlier research from 2013 was that expenses for funds of this size were competitive, but only when trustees handled some or all of the management.

Additionally, at all levels of administration, funds with balances of $200,000 or more offer the same value as retail or industry funds.

Additionally, Rice Warner discovered that comparisons across SMSFs in the accumulation and pension phases, as well as those with one member or two members, were comparable. Additionally, it was shown that SMSFs with numerous members and a mix of accumulation and pension accounts can compete with balances as low as $100,000 and may even be the least expensive from credits as high as $150,000 if trustees handle some or all of the management.

As anticipated, retail or industrial funds were typically more expensive than SMSFs with balances under $100,000. In 2019, 8.5 percent of SMSFs had assets worth under $100,000, a significant decrease from the 11 percent recorded in 2013, the year Rice Warner conducted its most recent survey. Only if they anticipated growth to a competitive level within a reasonable amount of time would SMSFs of this size be appropriate. There is proof that the majority of SMSFs with low balances either grow rather quickly or are late in the drawdown phase and getting ready to close.

At the beginning of 2017, there were 1,811 funds with balances of $50,000 or less. By the end of 2019, 40% of these funds had grown to balances over this amount, while 27% closed their doors and 33% remained in the field.

The expensive direct property costs

The fact that SMSFs are the only kind of super fund that permits members to invest in direct property is one of their advantages and attractions. But there is a steep price for this.

Additionally, Rice Warner examined all fees paid by SMSFs, both those with and without direct property interests. While median fees for SMSFs without natural property are competitive for balances of $200,000 or more, they are higher than the most expensive retail and industrial funds across the board for those with the direct property.

Using SMSFs with a balance of $500,000 as an example, in 2019 the median fees for funds without direct property were $3,207, while the median fees for funds with natural property were $9,969 per fund. Expenses totalled $15,908 without direct property and $29,799 with instant property for funds with the same balance but significant prices.

For funds of all balances, this pattern of total fees was repeated. This was ascribed in the research to the greater administration costs for accounting and related services as well as the higher investment costs of servicing direct property compared to other investments.

This emphasizes how crucial it is to conduct a cost-benefit analysis before choosing an SMSF. Direct property investment may not be as profitable for some SMSFs as other types of investments. For some, particularly those who own commercial property, the advantages of holding real estate in super may outweigh the costs, particularly when contrasted to the costs of holding real estate outside of super.

The conclusion

For funds with lower balances, SMSF charges are proportionately greater and less affordable compared to other kinds of super funds. These expenses include start-up, ongoing, and closure fees as well as non-cash costs like the time you spend managing your fund. Therefore, if you're thinking about establishing an SMSF, the advantages must exceed the disadvantages; otherwise, an industrial or retail fund would be a better option.

This article only contains general information. To evaluate if creating an SMSF is appropriate for your unique financial requirements and circumstances, it is important to seek independent professional advice.

Who are the owners of SMSFs?

What kind of people are drawn to administering self-managed super funds (SMSFs), which are now firmly established in Australia's superannuation system?

Currently, SMSFs, which are privately managed super funds, can have one to four members.

More than 1.1 million Australians are members of SMSFs, according to the most recent statistics from the Australian Taxation Office (ATO). Although the growth rate has been declining for several years as the industry develops, the number is still growing steadily. They possess 26% of the $2.9 trillion in super assets collectively.

These SMSF members are increasingly female, especially in younger age groups. Women made up 47% of SMSF members as of the most recent count, and their average balance was $624,000 Women have savings balances that are faster growing than men's, up 28% over five years compared to men's 21%, even if they are still less than the average balance of $754,000 for men.

Nearly 70% of SMSFs have two members, who are often an older married couple; 23% have just one member; only 3.5% have three, and a comparable percentage have four. And for many years, these percentages have remained stable. The proposed increase in the maximum member count from four to six has been postponed. The Morrison Government has stated that it is still committed to the reform, but given the present distribution of funding, there might not be much of a need for it.

Gender and age distribution

The age ranges and genders of SMSF members in June 2019 were very evenly distributed between 35 and 84, as shown in the table below.

The average age of SMSF members was 60, a little increase as baby boomers enter retirement. According to the most recent figures, there has been a modest decrease in the percentage of members in all age brackets under 70 and a slight increase in those over 70.

53 percent of members are male and 47 percent are female, which is a fairly equitable distribution by gender.

Members' age and gender distribution in SMSFs: Australian Taxation Office, all members

According to the ATO figures, men and women between the ages of 35 and 44 have been the most active when it comes to lately starting new SMSFs. In 2017–18, the median age of new members was 46.

In all age groups between 25 and 49, women are establishing SMSFs more quickly than males, which is positive. The age and gender of SMSF members who were founded in the March quarter of 2020 are shown in the following table.

Income levels

As of June 2018, the median income for SMSF members was $64,000, and the average taxable income was $117,000 per member. Comparatively, members of other super funds had taxable incomes that ranged from $48,000 to $62,000 on average.

The salary ranges of both male and female SMSF members are shown in the following table. Significantly, the aforementioned table also shows that a higher percentage of female SMSF members than male SMSF members had taxable incomes of less than $80,000. Additionally, it shows that a higher percentage of male SMSF members have taxable incomes over $80,000.

The table below (for the 2018 financial year) demonstrates that, contrary to common belief, SMSF members typically have larger taxable incomes than members of other types of super funds.

Balances in superannuation

The average account balance for all individual SMSF members is $678,621, albeit individuals greatly skew this number, according to the most recent ATO statistics. The median salary is less generous at $408,237 (half of all members have a ratio higher and half have a balance lower). These numbers have increased by 25% and 28% during the previous five years, respectively.

Women are starting to close the gender pay gap; their average balance increased by 28 percent to $624,000 over the course of five years as of June 2018. Over the same period, the average ratio for men rose by 21% to $754,000.

The balance peak for both men and women between the ages of 75 and 84 is seen in the table below. This can mean that either retiree aren't spending as much as they could in retirement or that they intend to leave their heirs a sizeable inheritance. The average asset per member in the SMSF establishment year in 2018 was $214,000, while the median was $125,000, according to ATO statistics.

There is anecdotal evidence that some people establish funds with less in the expectation of increasing their ratio fairly quickly, despite the fact that it's generally advised that the cost of setting up and maintaining an SMSF may not be in the best interests of members with a balance of less than $200,000. In any case, it appears that the message is getting over. In the five years leading up to 2018, the percentage of SMSF members with balances of $200,000 or less decreased from 46% to 40%.

Locations

Victoria has a higher proportion of SMSFs than any other Australian state or territory. Victoria has 30% of all SMSF members while having only 25% of Australia's population. 33 percent of all members are from NSW.

In contrast, compared to their respective proportions of Australia's overall population, Queensland, Western Australia, Tasmania, and the Northern Territory are underrepresented among SMSF members.

The variations among SMSF participants during the accumulation and retirement stages

According to the most recent ATO statistics, 39% of all SMSF members are currently in the retirement phase (previously known as the pension phase). Given that the average SMSF fund has two members, typically a married couple who may be in different member phases, the situation is a little more complicated there. Because of the $1.6 million transfer balance cap that went into effect in July 2017, some retirees may have funds in both their accumulation and pension accounts.

As of March 2020, 48% of funds had at least one member in the retirement phase, although 31% had a mix of accumulation and retirement assets, according to Class Super (an SMSF administration software firm). Funds with only accumulating members are referred to as accumulation funds. Retirement SMSFs hold pension accounts only, without any buildup of holdings.

The table below shows how the class divided the numbers for each member phase. While mixed phase SMSFs are not the largest SMSF member group, they do contain much more net assets per member than those in either the accumulation phase or the retirement phase, according to Adam Solomon, Class Head of Analytics.

Funds with wealthy pension members who have more than the transfer balance ceiling of $1.6 million will often be in a mixed phase following the regulation change in July 2017 limiting the amount that may be transferred into a pension account.

"Mixed SMSFs include funds with a mix of accumulation members and pension members as well as funds where all members are in the retirement phase but some fund assets are retained outside of pensions. If a participant in a mixed fund has both accumulation and pension balances, there can only be one of them, according to Solomon.

Different types of SMSF members

The urge to select and manage their super investments is the characteristic most frequently found in persons who decide to form or join an SMSF. In a report released in 2017, CBA and the SMSF Association classified SMSF members into the following four investor profiles:

  1. The Controller: This category of SMSF members is the most prevalent. They desire to have extensive control over the management of their fund and the choice of investments. While they may consult professionals, they are also comfortable managing their SMSF, particularly when it comes to investing choices.
  2. The Self-directed Investor: Compared to a controller, this kind is less likely to consult a professional for help managing their fund or choosing investments. They are extremely confident in their skills.
  3. The Coach Seeker: Coach seekers manage their SMSFs and make financial decisions in a moderately active manner. They don't entirely outsource, but they do seek professional advice to assist them.
  4. The Outsourcer: This category of SMSF members chooses to hire specialists to handle the day-to-day management of their fund and investment decisions.

Conclusion

Along with an increase in average individual and collective fund balances, Australia has seen an increase in the number of SMSFs in recent years. Another trend is the rise in female SMSF owners and the narrowing of the gender pay gap in account balances.

In general, the ability to select and manage their super investments is what draws SMSF members. However, establishing and managing an SMSF can come with a number of expenses and duties, so the advantages must exceed the drawbacks.

Scroll to Top