Should you set up, retain or wind up a SMSF?
- 4 days ago
- 4 min read
It may surprise you to know that we recommend just as many people wind up their SMSF, as set one up.
The simple fact is, SMSFs can be fantastic, but only if the pros (and cons) align to your individual circumstances!
When SMSFs make sense:
When you have the time and inclination to manage one: Whilst your Financial Planner and Accountant will help you with certain tasks, by operating a SMSF, you are committing to becoming a trustee (or director) of your own superannuation. Therefore, you have to commit to various obligations including:
Adhering to the 'sole purpose' test.
Completing annual tax returns and audits.
Complying with the SIS act and other laws.
Creating an investment strategy and making investment decisions.
When you have the financial means to make them cost effective: ASIC has previously provided guidance that individuals or couples should have at least $500,000 in superannuation before considering establishing an SMSF. This is largely because the annual accounting, audit and regulatory fees will be at least $3,000 per year. The table below shows the percentage based fees of this cost based on the account balance:
Super Account Balance | SMSF Percentage Fee | Estimated Industry/Retail Percentage Fee |
$100,000 | 3% p.a. | 0.4% p.a. |
$500,000 | 0.6% p.a. | 0.4% p.a. |
$1,000,000 | 0.3% p.a. | 0.3% p.a. |
$2,000,000 | 0.15% p.a. | 0.3% p.a. |
As this table illustrates, SMSFs can be very high cost for lower balances, but very low cost for higher balances. By contrast, most industry and retail superannuation accounts are largely fixed percentage based, and only become slightly cheaper as balances increase.
When you have a compelling reasons to set up a SMSF, for instance:
You may be a business owner and wish to purchase a business premises using your SMSF funds, and instead pay rent to your own SMSF. Note: The rent needs to be on commercial terms and it's important that you actually need the business premise in the first place, and it complies with the sole purpose test.
You need specific investments that are unavailable through other means. For example, in the past we have helped clients comply with 'Sharia-Compliant Investing' within the SMSF.
You are an expert in property investing (for example you are a buyers advocate, real estate agent or highly experienced personal property investor) and you can therefore leverage your skills in direct property investing via an SMSF.
You have a SMSF balance which is sufficiently high (usually >$1m) that it becomes cost effective relative to other super options (see table above).
When SMSFs don't make sense:
When none of the above factors are present you need to consider whether setting up an SMSF is the right for you, or if you already have one, whether retaining the SMSF is the best course of action.
The decision does become much harder with existing SMSFs because you need to factor in the time and costs of winding up SMSFs. For instance:
You may pay capital gains tax on assets you sell before age 60 and retirement or age 65 (whichever comes first).
You may pay agents and other fees on properties you sell in the SMSF.
You will incur accounting fees to facilitator the SMSF wind up.
These potential exit costs, make the decision to set up an SMSF even more important to get right.
Another cost to consider is opportunity cost. We see many people blindly set up SMSFs because they think they can do better than their current super fund or perhaps because they think investing in property is safer.
Let's consider an example:
The AustralianSuper Balanced option is the largest superannuation investment option in Australia and has generated 10 year returns of 7.94% p.a. Therefore, we can use this rate as an opportunity cost that you would need to beat.
As the table above shows, if you started an SMSF with $100,000, the fees are likely to be ~$2,600 per annum more expensive than AustralianSuper. Therefore, you would also need to claw this back with investment returns of over 10.54% net p.a. (7.94% + 2.6%).
It is extremely difficult for an investment property to generate these net investment returns, and even harder in an SMSF where:
Interest rates are much higher than personal lending rates
You are not able to benefit from negative gearing in the same way
Conclusion
SMSFs are fantastic for the right clients, and terrible for the wrong clients. As Financial Planners, we are best placed to assess your circumstances and determine whether an SMSF would be right for you, and then provide you with ongoing guidance and support if they are.
If you would like help:
The purpose of this blog is to provide general information only and the contents of this blog do not purport to provide personal financial advice. We strongly recommend that investors consult a financial adviser prior to making any investment decision. The contents of the our blog does not take into account the investment objectives, financial situation or particular needs of any person and should not be used as the basis for making any financial or other decisions. The information is selective and may not be complete or accurate for your particular purposes and should not be construed as a recommendation to invest in any particular product, investment or security. The information provided on this blog is given in good faith and is believed to be accurate at the time of compilation.
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