The Balance at Which Running Your Own Fund Stops Costing More

01 What an SMSF actually costs

The unavoidable costs are the annual supervisory levy, an independent audit that must be done every year, and preparation of the fund's financial statements and annual return. Those are fixed regardless of balance.

Above that sit the optional costs, which vary enormously. An online administration service with a simple portfolio is at one end; a full accounting relationship, an investment adviser and an actuarial certificate for a fund partly in pension phase is at the other.

Property adds its own layer: valuations, a separate bank account, and where a limited recourse borrowing arrangement is used, the establishment and ongoing costs of the bare trust structure.

The ATO publishes data on what SMSFs report spending, and the spread between the median and the average is wide because a small number of complex funds pull the average up. The median is the more useful figure for someone contemplating a simple fund.

Source: ATO — Self-managed super funds

02 Where the crossover sits

An APRA-regulated fund charges a percentage plus a modest flat amount, so its cost rises with the balance. An SMSF charges mostly flat amounts, so its cost as a percentage falls as the balance rises. Somewhere the two lines cross.

For a fund with genuinely low fixed costs the crossover can be well under $300,000. For a fund with an accountant, an adviser and a property it can be over $800,000. Quoting a single threshold conceals which of those is being described.

The comparison also has to be against the alternative you would actually use. A low-cost industry option charging a small percentage is a much harder benchmark than a legacy retail product, and the fee arithmetic in the super fees post applies to both sides.

The worked example below takes your own fixed costs and your alternative's percentage and returns the balance at which they meet.

Source: ASIC Moneysmart — Self-managed super fund (SMSF)

03

SMSF against a large fund

	SMSF	APRA-regulated fund
Cost structure	Mostly fixed dollars	Mostly a percentage
Investment choice	Almost anything within the rules, including direct property	The options the fund offers
Who is responsible	You, as trustee	The fund's trustee
Time required	Ongoing, every year	None
Insurance	Arranged by you, individually underwritten	Often available without underwriting
Compensation for fraud or theft	Not available to SMSFs	Available in specified circumstances

04 The obligations that come with it

As a trustee you are personally responsible for the fund complying with superannuation law, and that responsibility cannot be delegated to an accountant or adviser. Penalties for breaches apply to trustees personally.

The sole purpose test governs everything: the fund must be maintained to provide retirement benefits, and any arrangement that gives a member a present-day benefit is a breach. Using a fund-owned holiday house for a weekend is the standard example and it is not a technicality.

The in-house asset rules, the prohibition on acquiring most assets from members, and the arm's-length requirements on any related-party transaction are the other three that catch people. Business real property is the significant exception to the acquisition rule.

An annual audit by an approved SMSF auditor is not optional, and the auditor is required to report contraventions to the ATO. That is the mechanism by which mistakes come to light, usually a year after they were made.

Source: ATO — Self-managed super funds

05 What an SMSF cannot do

It cannot give you access to compensation for fraud or theft. The statutory compensation scheme that applies to APRA-regulated funds does not extend to SMSFs, on the basis that you are the trustee and the losses are yours.

It cannot offer insurance without underwriting. Default cover in a large fund is available regardless of health; an SMSF has to buy a policy on the open market, which for a trustee with a medical history is materially more expensive or unavailable.

It cannot resolve disputes through the Australian Financial Complaints Authority. Disagreements between SMSF trustees are a court matter, which is slow and expensive and is the reason relationship breakdowns inside a two-member fund are so difficult.

And it cannot be run passively. The trustee obligations continue regardless of interest, health or capacity, which is the risk that arrives late and is hardest to plan for.

Source: ASIC Moneysmart — Self-managed super fund (SMSF)

06 Winding up, and why to plan it early

Every SMSF ends, and the common endings are a member entering aged care, a member losing capacity, a relationship breakdown, or the trustees simply no longer wanting the work. None of those arrives at a convenient time.

Winding up requires the assets to be sold or transferred, a final audit, a final return, and the balances to be rolled out or paid as benefits. A fund holding a single illiquid property is the difficult case, because the wind-up cannot proceed faster than the sale.

An enduring power of attorney allows an attorney to be appointed as trustee if a member loses capacity, which keeps the fund compliant. Without one, the fund has a limited period to restructure before it stops meeting the definition of a self-managed fund.

The practical answer is to hold enough liquidity for the fund to meet pension payments and a wind-up, and to have the power of attorney in place before it is needed rather than after.

Source: ATO — Self-managed super funds

07 The reasons that actually justify one

Direct property, and particularly business real property, is the strongest. An SMSF can acquire business real property from a member at market value and lease it back to the member's business, which no large fund can replicate.

Control over the specific investments is the second, where it is a genuine preference rather than a belief that you will pick better. The research on that belief is not encouraging.

Estate planning flexibility is the third. An SMSF can pay a death benefit as a pension to a dependant on terms the trust deed sets, and can hold reserves and structure nominations more flexibly than a large fund's standard forms allow.

Holding an asset a large fund will not hold is the fourth, and it covers more ground than property: unlisted investments, collectables under the strict storage and insurance rules, and direct holdings a member wants for a specific reason. Each brings its own compliance requirements, and collectables in particular have rules that make them impractical for most funds.

Wanting lower fees is the weakest, on its own. It is commonly assumed that beating the crossover settles the question. It does not — the fee saving above the crossover is a few thousand dollars a year, bought with a job you now have to do every year for as long as the fund exists, and a compliance exposure that sits on you personally.

Source: ASIC Moneysmart — Self-managed super fund (SMSF)

08 What I would actually do

Do the arithmetic first, using the fixed costs you would actually incur rather than a marketed figure, and against the specific fund you would otherwise use.

Then ask whether there is a reason beyond cost. If the honest answer is no, and the balance is near the crossover, the SMSF is a job taken on for a small margin.

If there is a reason — property, control, a particular estate structure — the cost question becomes secondary and the obligations become the thing to be sure about. Read the sole purpose test and the in-house asset rules before establishing the fund, not after.

Compare like with like on the investment side too. An SMSF holding a diversified portfolio of listed shares and a large fund holding a similar mix are doing the same thing at different prices; an SMSF holding one commercial property and a large fund holding a diversified portfolio are not comparable at all, and the fee difference is the least important thing separating them.

And plan the exit at the start. Funds have to be wound up eventually, usually when a trustee can no longer manage it, and a fund holding an illiquid property with a member in aged care is the hardest version of that problem.

Source: ATO — Self-managed super funds