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Is an SMSF right for you?

Ask yourself these questions to help decide if a self-managed super fund is right for you.

You generally need a reasonable amount of super to justify the costs of an SMSF however there is no minimum balance required by law. The main considerations are comparing the costs incurred with those for industry or retail super funds and ensuring that the balance, and any investment returns, are not absorbed by costs and fees. The fixed costs, (such as the administration fee and audit fee) when measured as a percentage of the balance, will reduce as the balance increases. An SMSF can pool the superannuation accounts of up to four members to increase the total SMSF balance.

The measure to increase the number of members allowed in an SMSF from four to six was introduced into Parliament 2 September 2020 and remains before the senate.

Generally, an SMSF should not be considered until there is a balance of at least $100,000*

 

SMSF BALANCE*
COST COMPARISON WITH INDUSTRY AND RETAIL FUNDS
LESS THAN $100,000Not cost-effective in comparison to a large superfund, unless the SMSF could grow within a reasonable time.
$100,000 TO $200,000Are competitive with APRA regulated funds provided the Trustees use one of the cheaper service providers or undertake some of the administration themselves.
> $200,000 Competitive with both Industry and Retail funds even for full administration.
> $250,000 SMSFs become the cheapest alternative provided the Trustees undertake some of the administration, or, if seeking full administration, choose one of the cheaper services.
MORE THAN $500,000SMSFs are generally the cheapest alternative.

*The information provided on this table has been taken from the Rice Warner research report ‘Costs of Operating SMSFs 2020’. It does not take into account the personal objectives, financial situation, or particular needs of any individual and should not, therefore, be relied upon to make financial decisions. The cost of managing an SMSF is only one of the factors that needs to be considered when deciding whether an SMSF is right for you.

 

The costs will depend on how you choose to manage your SMSF and the investment strategy. The more complex you make it, the more it’s likely to cost. Administration costs are largely fixed whereas investments costs vary with the type of investments and the frequency of transactions. Also, consider the net returns you’re expecting your SMSF to make (total return less costs to run). In addition to administration costs and transaction costs, there is a setup fee and some ongoing regulatory charges.

As a general rule of thumb, if your expected annual costs are less than 2% of your super balance then an SMSF may be worthwhile

It will depend on what type of investor you are and how active you are when managing your SMSF investment portfolio.

As an SMSF trustee you'll need to:

• monitor your investment strategy
• research investment options
• keep abreast of how your investments are performing and adapt your strategy
• organise annual valuations (if required)
• stay on top of your reporting obligations and make sure you meet important deadlines
• keep up-to-date with changes to superannuation laws affecting your trustee responsibilities

While it might sound like a lot of effort, you can outsource many of these tasks to a professional provider and focus on investing. It is important to understand that as the trustee of your SMSF you are responsible, and will be held accountable, for the compliance of your SMSF with the rules and regulations. You may delegate the duties, but not the responsibilities.

You will need to spend some time monitoring your SMSF but how much time you spend investing is up to you

The sole purpose test requires that your SMSF and its assets are used solely to provide benefits to members in their retirement and, on the member’s death to dependants.

For example, If you intend to use the investment property for your holidays, or hang the art piece in your home, you are likely to breach the sole purpose test.


You must only invest in things that will benefit members in retirement

You can set-up and run an SMSF by yourself, but most trustees engage an accountant or a professional SMSF manager (like us) to manage the bulk of the administration work.

We can also help you understand what an SMSF can and can't invest in - but we won't be able to recommend any specific investment strategies or financial products. If you need help with that please contact a financial adviser.

It is important to understand that as the trustee of your SMSF you are responsible, and will be held accountable, for the compliance of your SMSF with the rules and regulations. You may delegate the duties, but not the responsibilities.


You don't need a professional to manage your SMSF but most trustees do get some help

Anyone 18 years or over can be a trustee of an SMSF as long as they are not:

  • classified as an undischarged bankrupt
  • mentally incapacitated
  • charged with certain criminal convictions
  • disqualified by a court or regulator (e.g. by ATO)
An individual under the age of 18 can be a member of an SMSF, but not a trustee.

SMSF residency rules can be complex. Generally:

  • the SMSF must have been established in Australia
  • the central management and control must ordinarily be carried out by trustees residing in Australia
  • for the purposes of determining whether contributions can be made by non-Australian resident members, at least 50% of the value of the SMSF’s assets must be attributable to active members who are Australian residents, for the contribution to be able to be made.

If you are planning to leave Australia for more than two years you should seek professional advice.

If you plan on moving overseas permanently an SMSF is probably not right for you