SMSF setup/ongoing costs...

[JIT]

Hi,

Anyone know how much it would cost to set up a self-managed super fund (SMSF) and what are the annual costs to maintain it?

Just curious as to how cheaply it can be done.

I know people say minimum start up funds need to be 100k-200k, but could it possibly be feasable at say...20k or 50k???

Has anyone done the compliance stuff themselves without the help of an acccountant, to save money and make it more feasible?

GSJ

 

[redwing]

About $650 to set up and $1500 p/a for compliance and audit paperwork

Don't forget to look at exit fee's from some funds and some planners etc have trailing commisions on funds that are put in each 1/4 for up to three years

 

[Pushka]

You also cant do the returns yourself - they must be audited every year. It costs us around $3000 pa to have the returns prepared and audited, which is for a fund over $500k with around 30 share transactions.

 

[JIT]

Pushka,

I don't follow, why can't you do compliance yourself? Who 'audits', you mean the ATO?

I just did a google search and there's a few links on "DIY" SMSF related things...I will check this out.

GSJ

 

[geoffw]

When I set up my SMSF in 2000, there was no audit requirement- or at least, audits were (perhaps?) done by the ATO. This meant that running costs were relatively cheap.

ATO now require all SMSF funds to be independently audited. This adds substantially to the costs.

For me, it's no longer really worth while to run an SMSF. But I have no choice as I have a rather illiquid investment.

 

[JIT]

Just started some research on SMSF funds and found this link:

http://www.villagemall.com.au/content/webledger/Industry/Superfund.htm

$250 per year for DIY Superfund Management?

So on 20k that's 1.25% pa compliance costs???

Will have to read this in more detail...

GSJ

 

[Mry]

Super funds are very time consuming for an accountant to do. They have rules that other funds don't have. The assets are recorded at market value instead of at their cost base on financial statements. All the investment income has to be added together. An independent audit must be performed.

For an example of the lunacy, lets say you buy a bunch of shares and receive one dividend. The shares are recorded on a capital register, revalued for the financial statements, the dividend is recorded on the financial statement and 2 other places in the tax return, the tax credits are accounted for with the others, the income and change in value is then apportioned to each account holder and the dividend and the purchase documents must be sighted by the auditor.

On your personal return, you record a dividend once, and the purchase price is accounted for when you sell it.

I do have one client that requires an audit and they lodge the return themselves. They have done this for four years now and I saw them two weeks ago and they have now given up and given it all to me. Heh.

Anyway, as for whether it is worth it, there are 2 considerations.
1 - Can you make more money than a professionally managed super fund?
2 - Will your accounting fees be less than the professionally managed super fund?

Usually the higher your super balance, the better it is to run your own. I wouldn't recommend a super fund to anyone with under $140k.

 

[AmandaBS]

As I do the financial accounts for our SMSF we do save a few $ but we get the tax return/minutes prepared each year $900, plus audit $400.

Here's an extract off our website about running a SMSF which you may find of interest:

A self managed superannuation fund (SMSF) is a superannuation fund that you operate and run by yourself.
Managing an SMSF is strictly regulated by the tax office to ensure it complies with the Superannuation Industry (Supervision) Act 1993 (SIS). An SMSF performs the same role as other funds by investing contributions for the sole benefit of members upon retirement.
Usually consisting of 1-4 members, an SMSF is also required to have trustees that are also fund members. A SMSF is required to keep separate records, lodge a tax return and have the financial accounts audited by an approved auditor.

Rules on running a SMSF
An SMSF must follow an investment strategy through compliance filters:

Cannot borrow funds and cannot lend to members or relatives
Cannot invest in an asset that is subject to a security and cannot operate a business
Investments must be at arm’s length
The investment must be carried out for the sole purpose of providing for the members’ retirement benefit
Investments purchased from a related party ("in-house assets") must not exceed 5% of total fund assets.


Advantages of an SMSF are that you control investment decisions and diversity, and a 15% flat tax rate applies. Where assets are held for over 12 months, a 331/3 CGT discount applies. Also, members’ life insurance premiums are tax deductible and there is a tax exemption status in pension mode. The main disadvantages are that the SMSF must comply with the SIS Act, and so maintaining the SMSF can be time consuming.

 

[The Y-man]

Hi Amanda,

Cannot borrow funds and cannot lend to members or relatives
....
Investments must be at arms length...

Can the fund be lent to a Trust where the trustee / beneficiary may be the members?

Cannot invest in an asset that is subject to a security and cannot operate a business

I am unsrue of this clause. Is this simply another way of saying "can not borrow"

Many thanks

The Y-man

 

[alexlee]

Cannot invest in an asset that is subject to a security and cannot operate a business

Does that mean a super fund cannot buy/sell options? Would instalment warrants be considered derivatives in this case?
Alex

 

[JIT]

Just had a closer look at the link I posted earlier, for this 'Web SuperFund'.

It costs $250 per year for the compliance software that enables preparation of tax returns and other important documents, but there is a 50% discount now - so that makes it $125 per year. Add audit costs of $400 per year, so that's $525 per year - for a 20k SMSF, that's a cost of 2.6% pa, for a 50k SMSF, it's 1.05% pa.

Still, not cheap, and it assumes you will be able to use the software and complete compliance documents without requiring paid accounting/investment advice.

Will have a chat to them...

GSJ

 

[redwing]

Does that mean a super fund cannot buy/sell options? Would instalment warrants be considered derivatives in this case?
Alex

You should be able to do Installment Warrants and Derivates from memory

$3,000 for Audits is way to much...MANY are available for $1,500 p/a

We're exploring a SMSF at the moment so this discussion is Opportune

 

[alexlee]

The biggest issue is age, here. By that I mean, if you're <45, then SMSF may not be such a great idea (because you still have 20+ years of compounding ahead, which means gearing will be MUCH better for you).

If you are, say, a business owner in your 50s or 60s and want to get out and put the money into a SMSF, then it's a good idea.

If you still have years of investing ahead of you, SMSF might be riskier. The govt can still change aspects of super rules such as minimum withdrawal age, tax rates, etc (especially as the current crop of boomers retire and many might realise they don't have enough retirement savings and need more govt assistance).

Compare this to, say, using a family trust. Many more years of law to back you up, and it's unlikely the govt will change trust law significantly (they suggested taxing trusts like companies before and it never eventuated).
Alex

 

[AmandaBS]

Y-man, Thats correct a superfund cannot borrow funds so you can't take advantage of any leverage. Likewise "cannot lend to members or relatives" includes associated entities such as family trusts. Here's a recent ATO Interpretive decision (not law just their opinion as a guide)

http://law.ato.gov.au/atolaw/view.h...iT=99991231235958&recnum=1&tot=1&pn=ALL:::ALL

Alexlee, instalment warrants are acceptable as long as thats part of your SMSF investment strategy. In fact we have Telstra instalment warrants that after 10 years should have paid for themselves, but given the poor performace over the years it looks like we'll need to tip some cash in to pay them out. Damm should have gone with CBA which was only $15 10 years ago!

Anyone thinking of setting up a SMSF should first seek professional advice.

 

[alexlee]

Thanks, Amanda. So an asset that is subject to a security is what, exactly?
Alex

 

[AmandaBS]

Alexlee,

My understanding of the rules is that a SMSF basically cannot hold any risk.

So, for example, you couldn't use the fund to tip in say $100,000 and then you borrow another $100,000 and hold the property in joint names, as the bank would hold security over the house. Also any arrangement where there is the sharing of income and expenses in the same proportion, could be seen as a partnership, and therefore carrying on a business.

The rules for SMSF are very complicated and as stated before anyone considering setting one up should first seek professional (paid) advice.

 

[geoffw]

Add audit costs of $400 per year,

Yadreamin!

If you can get audit costs like that, I'd like to know.

Mine are usually much higher, for an SMSF which is extremely inactive- two investment transactions per year, four deposits.

I set it up under one set of rules, and the rules changed drastically. Perhaps unfair- but I can understand why ATO want (need) to audit.

 

[redwing]

Alexlee,

My understanding of the rules is that a SMSF basically cannot hold any risk.

So, for example, you couldn't use the fund to tip in say $100,000 and then you borrow another $100,000 and hold the property in joint names, as the bank would hold security over the house. Also any arrangement where there is the sharing of income and expenses in the same proportion, could be seen as a partnership, and therefore carrying on a business.

The rules for SMSF are very complicated and as stated before anyone considering setting one up should first seek professional (paid) advice.

Funnily enough I've been reading about SMSF's being able to trade CFD's sounds risky !!

Aussie Stock Forums

 

[Mry]

An SMSF is able to engage in investments that have risks, as long as those risks are acknowledged and part of an investment plan (ie diversified). For example, a super fund that invests 100% of its money in an investment that 'returns' 20% per month overseas will probably fail.

What they cannot do is borrow money.

Just about anything on the stock exchange short of margin lending appears to be ok. That's a bit scary.

 

[tubs]

I can trade options in mine, but I believe the deed has to be written specifically to allow for it.