Experts challenge old SMSF objection: You don’t need $500K to make it work

To have a self-managed superannuation fund (SMSF) or not? That’s a question contemplated by many pre-retirees, particularly those who’d like more control over the investment of their retirement savings or who want to invest in assets not available to superannuation fund members, such as a single residential property.

One of the deciding factors for such savers is often whether the cost (and effort) of managing a SMSF outweighs the benefits that may be gained. For some time too, the decision on the cost front has been informed by a well-known finding by the Australian Securities and Investments Commission that an SMSF needs to contain an minimum of $500,000 in investible assets to make its running costs worthwhile.

According to the Australian Taxation Office (ATO), there were almost 600,000 SMSFs being operated in Australia as of June 2020, and more than 60 per cent of those funds had balances of $500,000-plus. Almost 22 per cent of SMSFs held between $200,000-$500,000 in assets, while 6.5 per cent held $100,000-$200,000 and the remainder held less than $100,000.

Does that mean that about 40 per cent of the SMSFs currently in operation are a losing proposition, though? Actuarial consultancy Rice Warner says possibly not, in a report that questions the ‘$500,000 rule’.

The ‘$500,000 rule’

For the second time in less than a decade, Rice Warner took on the challenge of looking at the cost of running an SMSF and comparing it to those borne by a member of a super fund regulated by Australian Prudential Regulatory Authority (APRA) who has the same personal super balance.

(It should be noted that SMSFs tend to have mainly fixed costs, since their trustees are responsible for meeting the requirements of numerous pieces of tax, super and corporate legislation – the ATO’s guide to administering an SMSF runs to 36 pages! – while the costs imposed on super fund members tend to be variable.)

Rice Warner’s latest research found that SMSFs with balances between $100,000-$200,000 could in fact directly compete with APRA-regulated funds on cost-effectiveness if the SMSF’s trustees used the cheapest service providers and/or undertook most of the administrative tasks themselves.

However, Rice Warner said that SMSFs with more than $200,000 would be just as cost-effective as APRA-regulated funds even in cases where the trustees outsourced all services, provided they used the cheapest suppliers. This finding went directly against the $500,000 figure that many financial commentators, as well as the government, have used for years.

Rice Warner also found that SMSFs with assets below $100,000 wouldn’t be worth the extra cost and effort an SMSF entails. SMSFs with $500,000-plus in assets that are in the accumulation phase attract lower costs than the cheapest APRA-regulated fund, while of those in the pension phase, only SMSFs with the highest admin fees would be more expensive than the cheapest APRA-regulated fund.

The consultancy’s report also highlighted how costs widely varied significantly among SMSFs, with those that didn’t invest directly in property or use more complex investment structures such as using gearing incurring lower costs, most likely due to having fewer  accounting, auditing and investment costs.

Why the change?

As noted above, it wasn’t the first time Rice Warner had investigated the cost-effectiveness of SMSFs. It first made a comparison with APRA-regulated funds in 2013, when SMSFs were generally more expensive to run and so less competitive with mainstream super funds.

In 2013, Rice Warner found that SMSFs with balances above $250,000 could be competitive with other funds while those with $500,000 were usually the cheapest alternative overall, however both outcomes were only achieved if trustees took on most of the burden of running the SMSF themselves rather than outsourcing it.

Then in 2019, the Australian Securities and Investments Commission (ASIC) released advice that said SMSFs cost $13,900 a year to run on average, based on ATO data, and backed the $500,000 figure, saying that SMSFs with less than this in investible assets were likely to have lower returns after expenses and tax than APRA-regulated funds.

But sceptics at the time, including Rice Warner, called the cost estimate misleading, noting that it was based on tax deductions that included the cost of insurance, which wasn’t actually a cost of running an SMSF. ASIC has since reissued the advice, removing the $13,900 figure, but maintained its stance on the $500,000 figure.

The current advice from ASIC says that balances below $500,000 could be in the best interest of the client if they’re willing to undertake majority of the admin work or where a large asset (such as a business property or an inheritance) or funds in other super accounts were transferred within months of the SMSF being established.

How to know if an SMSF is for you

ASIC’s advice does cover the current costs SMSF trustees face, including start-up costs such as setting up a trust deed as well as annual fees such as the SMSF supervisory levy, financial statements and tax returns, audit fees and actuarial certification. Additionally, there are insurance costs, investment costs, costs for closing up the SMSF and “opportunity costs” that relate to the time it takes a trustee to run a SMSF.

Although the costs line-up appears long, a decision about an SMSF made exclusively on super balance versus potential costs ignores the nuances of the common costs cited, Rice Warner said in its most recent report. It suggested giving consideration to some key issues behind the numbers, including:

• SMSFs that invest in complex assets push up the average cost figures cited but aren’t actually borne by SMSFs not invested in those assets
• An SMSF with a modest balance with investments made directly by the trustee isn’t equivalent to an SMSF with the same balance but invested through an expensive portfolio management service
• Savers able to make large contributions to an SMSF will find there are tax advantages to opening an SMSF with a small balance that quickly increases, which may be more beneficial than waiting until they’ve accrued a larger balance before opening an SMSF
• An SMSF doesn’t necessarily have to be the cheapest option to be competitive with an APRA-regulated fund
• The presence of insurance, its coverage and costs, relies on the personal circumstances of members irrespective of the size of their super balance.