Understanding the Costs of Running a Self-Managed Superannuation Fund (SMSF)

In the realm of self-managed superannuation funds (SMSFs), the question of cost has been a highly debated topic between SMSF experts and regulators. Determining the cost-effectiveness of an SMSF compared to larger public funds regulated by the Australian Prudential Regulation Authority (APRA) is essential. In the past, the Australian Securities and Investments Commission (ASIC) stated that SMSFs became cost-effective at a balance of $500,000. However, recent research and lobbying efforts by the SMSF Association have led to a revision of this figure. This article aims to inform readers about the costs associated with running an SMSF without providing personal opinions or advice.

The Research: Two major research studies commissioned by the SMSF Association shed light on the costs and performance of SMSFs. The first study, conducted by Rice Warner in 2021, focused on fees. The second study, carried out by the University of Adelaide, examined the performance of SMSFs compared to APRA-regulated funds at different fund balances. The Adelaide University research analyzed financial statement data from over 318,000 SMSFs between 2017 and 2019 and found that SMSFs with balances between $200,000 and $500,000 exhibited no significant differences in performance patterns.

Costs of Operating an SMSF: Rice Warner's report, "Costs of Operating SMSFs 2020," determined that SMSFs become broadly competitive at around $200,000 and are generally the most cost-effective alternative for balances of $500,000 or more. Furthermore, the research from the University of Adelaide confirmed the appropriateness of a $200,000 balance. Additionally, SMSFs with net assets exceeding $200,000, diversified beyond cash and term deposits, outperformed APRA-regulated funds in two out of three years between 2017 and 2019. Notably, the costs of running SMSFs, excluding statutory levies, have shown a decline according to senior consultant Alun Stevens from Rice Warner.

Fees Associated with an SMSF:

1. Setup Fee: The setup fee covers the costs involved in establishing an SMSF, such as the trust deed, ATO application forms, investment strategy, and general trust advice. If an SMSF opts for a corporate trustee structure, additional costs for setting up the company structure apply.

2. Ongoing Administration Fees: SMSFs incur annual compliance fees, including the ATO supervisory levy, financial statement and tax return preparation, and the cost of an audit by a registered auditor. While the supervisory levy remains fixed at $259, tax return and audit fees vary.

3. Investment Fees: Investment management fees depend on the assets held within the SMSF. Rice Warner suggests that estimating investment fees can be challenging due to the wide variation based on different asset types. However, for less complex investments like direct shares, exchange traded funds (ETFs), and managed funds, average annual investment fees can range from 0.07% to 1.75% per year.

Pension Accounts vs. Accumulation Accounts: The research also examined the costs of SMSFs with pension accounts. Funds with both pension and accumulation accounts generally incurred higher expenses compared to those with only pension accounts. However, SMSFs with solely pension accounts tended to have lower costs than funds with both pension and accumulation accounts or funds with only accumulation accounts. This difference can be attributed, in part, to the simpler investment arrangements often found in pension funds.

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