Cost of a self managed superannuation fund

Wanting to get more control of your superannuation and wondering what its costs to have your own self managed superannuation fund (SMSF)?

There are several components to the cost of running an SMSF, including:

  • Investment management fee
  • Accounting fee
  • Audit fee
  • ATO supervision levy
  • Professional fees for advice, administration and anything else you choose to outsource

The Australian Taxation Office (ATO) have just released a statistical overview of SMSFs for 2009-2010 that reveals some average costs based on fund size.

Graph source: ATO Self-managed superannuation funds: A statistical overview 2009-10, Graph 21

You might think your retail superannuation fund is expensive. But most modern off-the-shelf superannuation funds have total expenses (administration and investment) under 2% per annum. In fact most of my clients are in accounts where this fee is around 1% p.a. or less.

As you can see from the ATO’s graph, the average SMSF needs at least $200,000 in funds before the fee drops under 2% per year. And the average operating cost doesn’t drop under 1% p.a. until the balance is over $500,000.

Given that in Australia the average superannuation balance is well under that level you can see that a SMSF is not cost effective for most Australians.

So if you are considering a SMSF you need to have a much better reason than saving money. Read this article for an insight into when a SMSF may be appropriate.

Risky SMSF borrowing advice from real estate agents

The Institute of Chartered Accountants of Australia (ICAA) superannuation specialist, Liz Westover recently wrote of her alarm at some marketing material she received from a real estate agent promoting borrowing within a self managed superannuation fund (SMSF) to buy property.

Westover wrote: “I was surprised and somewhat alarmed that some of the information provided was technically wrong and misleading, particularly in relation to the tax measures.”

Remember that Real Estate agents are NOT licensed financial advice providers.

Real Estate agents are licensed facilitators of a real estate transaction.

And in the current property climate it seems that some will do whatever they can to get more transactions occurring.  Don’t allow yourself to be misled – get financial advice only from licensed financial advisers.

 
 

 

SMSF Guide

If you are contemplating a self managed superannuation fund or already have one then you may be interested in this useful SMSF Guide produced by Macquarie’s technical team

Over 29,000 self managed superannuation funds were established in the 2009-10 financial year, taking the total number of SMSFs to 427,491. (Source: ATO, Sept 2010).

If you are contemplating a self managed superannuation fund or already have one then you may be interested in this useful SMSF Guide produced by Macquarie’s technical team. (Look in the section called ‘Education Centre’. The Guide is called “Self Managed Super Funds – from set up to wind up“)

Self managed superannuation funds are increasingly popular as people believe a SMSF gives them greater control over their money. However a SMSF is often not needed to get the level of control you desire. Read my earlier article to discover when you may or may not need a SMSF.

SMSF: corporate or human trustee?

This article is reprinted with permission of the article author LawCentral. The views expressed are entirely their own and within their expertise. Read the article or watch the video here.

Question: My accountant suggested a corporate trustee for my Self Managed Super Fund. I already have a few companies – I know they are more expensive to operate than having individual trustees. Is he only trying to generate more fees from me? I’m not made of money you know.

Answer [by LawCentral]

It is a vexed question whether SMSFs should have corporate trustees. Everyone in the Superannuation game has a different opinion. I change my opinion daily.

But no two SMSFs are the same. So a blanket ‘yes’ or ‘no’ won’t cut it. Your adviser and accountant looks at the following things to formulate their opinion:

  • What is the relationship between the members? Will they change often?
  • What are the type and value of the SMSF assets?
  • Where are the SMSF assets located? Other states or countries?
  • How pedantic are you?
  • Do you need extra asset protection? Is there risk that the SMSF can go insolvent?
  • Are the members happy to pay higher maintenance costs for a company?
  • Contemplating Limited Recourse Borrowing Arrangements (formerly known as instalment warrants)?
  • Do you own more than one property in one state paying land tax?

Corporate Trustees add expense and complication. Your Accountant is best to do the cost/benefit analysis. If your accountant suggests a corporate trustee, they have already answered all of these questions.

Who can be trustee of a SMSF?

  • Humans as Trustees

If you want a human Trustee, all members of the SMSF must also be Trustees. You can’t pick and choose between members – it’s all or nothing. (There are minor exemptions for children and members living overseas.)

  • A company as Trustee (Corporate Trustee)

If you have a Corporate Trustee, all members must be the Directors of the Company. All Directors must be members of the Fund. The Corporate Trustee carries out its role as a Trustee of your superannuation fund just the same as you as individuals do.

If you are the only member of your SMSF, special rules apply. (See the Platinum member only section below.)

When should I have humans as trustees?

  • You want less hassle and the lowest administrative cost

It costs nothing (apart from food and shelter) to keep humans as trustees. There are no annual reports to ASIC or dates to lodge with ASIC.

  • You are unlikely to change the SMSF membership

It can become a nightmare to change the members of your SMSF with human trustees. Firstly, you need to admit (or exit) that person as a member (you have to do this anyway). Then, title to the SMSF assets is transferred to or from the member. This is because SMSF assets are held in the name of the trustees, not in the SMSF itself. For example, the four of you as members hold the SMSF land in your names. That is the law. You die; the property must now be transferred into different names. If you had a company, no transfer is required.

When should I have a corporate trustee?

  • You change the members of your SMSF often

If your members change often, you simply remove (or appoint) them as members and as directors of the corporate trustee. Although the directors change, the actual corporate trustee does not. As the SMSF assets are owned in the name of the corporate trustee, there is no need to jig about with the land titles office.

  • You are secretive and own lots of assets

Don’t want anyone to know what assets you own? A Corporate Trustee holds the assets in the name of the company. If someone does a land titles search using your personal name, they won’t find the real estate held in your SMSF.

  • You want to borrow in your SMSF

If you want to take advantage of Limited Recourse Borrowing Arrangements to borrow to fund SMSF assets, beware. Many lenders only agree to lend you money if you have a corporate trustee.

  • You need to amp up your asset protection

Assets in your SMSF are meant to be conservative – they are there for your retirement – not for speculation. Risky or not, I have had clients that have ended up with negative assets in their SMSF. Insolvency often leads to the SMSF Trustees going down with the sinking ship. Better to lose just a company.

  • You pay land tax

In most states, you pay a higher marginal rate of land tax the more land you have. Therefore, if you and your spouse already have a rental property then owning more land (as Trustee of the SMSF) increases the rate of land tax you pay. At Brett Davies Lawyers, we can usually transfer the land out of your name into the name of your new company – for no transfer (stamp) duty and no Capital Gains Tax.

Ok fine. I think I need a corporate trustee. Can I use one of my other companies as trustee?

Yes you can. But just because you can do something, doesn’t mean you should. Using a company for multiple purposes is fraught with risk. People who are pedantic and never make mistakes should only do it. I am pedantic and never make mistakes; however, I still use one company solely for my SMSF.

Why do you need a separate company? SMSFs are delicate. SMSF auditors are even more so. There can’t be any overlap between SMSF funds and other company funds. Weekly, I get calls from accountants where their clients accidentally used the wrong cheque book (or clicked the wrong internet banking account). Sure it is an accident, but the SIS Acts say this is incredibly illegal. No one can guarantee that they never make mistakes. Best to bite the bullet and set up a separate corporate trustee.

What are the ASIC fees for my corporate trustee company?

It is cheaper to run a company that acts as the trustee of your SMSF. Why? Because ASIC allows you to register this company as a ‘Special Purpose Company’. Your special treatment means that the annual ASIC review fee is only $41 per year (rather than the usual company review fee of $218). (The initial ASIC registration fee is still $412.)

You can build a Special Purpose Superannuation Trustee Company at LawCentral (it takes 8 minutes).

How do I update my SMSF to include a Corporate Trustee?

To change the trustee of your Self Managed Superannuation Fund (SMSF) to a Corporate Trustee, you do two things (in this order):

  1. Set up a company. Use the LawCentral Build a Company document to do this. After you build the company, you register it at ASIC. ASIC charges $412.
  2. Update your SMSF Deed by using the SMSF – Deed Update document available at LawCentral. Select: change your trustee into a Corporate Trustee. Insert: new company name, ACN and address

(Original publication date 18th October 2010 in LawCentral Bulletin 338.)

Should you use a Corporate Trustee to run your Self Managed Super Fund?

This article is reprinted with permission of the author LawCentral.

As with most things whether you use a corporate trustee to run your self managed superannuation fund entirely depends on your situation. Your accountant is the best person to ask.

A Corporate Trustee is good if you fall into the following categories:

You are secretive and own lots of assets

Don’t want anyone to know what assets you own? A Corporate Trustee holds the assets in the name of the company. If someone does a land titles search using your name, they won’t find the real estate held in your SMSF.

The members of your SMSF change often

Your members are the Trustees. So when a member changes, so do the Trustees. In this instance, you have to go back to the local titles office and transfer the property into the names of the new Trustees. There are generally no state duty or Capital Gains Tax issues to do this. But there are administrative costs to transfer.

You love asset protection strategies

Assets in your SMSF are meant to be conservative – they are there for your retirement – not for speculation.  Risky or not, I have had clients that have ended up with negative assets in their SMSF. Insolvency ensures that the Trustees of the SMSF can go down with the sinking ship.

You pay land tax

In most States you pay a higher rate of land tax the more land you have. Therefore, if you and your wife already have a rental property then owning more land (as Trustee of the SMSF) increases the rate of land tax you pay. You can transfer the land out of your name into the name of your new company – for no transfer duty and no Capital Gains Tax. (Get the help of a tax lawyer.)

Corporate Trustees add expense and complication. Your Accountant is best to do the costs/benefit analysis.

For the definitive arguments for and against a Corporate Trustee visit LawCentral and subscribe for Platinum membership.

Checklist to ensure your SMSF deed is up to date

This article is reproduced courtesy of the author LawCentral.

If you have a self managed superannuation fund (SMSF) it is essential that you as trustee regularly review the deed to ensure it is up to date. One benefit is that an up to date deed will give you access to the latest strategies as they become available.

When was your SMSF trust deed drafted? Review the list below produced by LawCentral to discover if and why you need to review your trust deed as soon as possible.

SMSF pre 2009

Since 2009, SMSF Deeds need updating because of:

  • Compliant with Auditing and Assurance Standards Board (AUASB) Guidance Statement GS 009.
  • Allowing you to borrow money on a limited recourse basis (Instalment Warrants) under section 67(4A) SIS Act. Sadly, many regimented deeds (even some new ones we have seen lately) actually go out of their way to stop borrowing and charging of SMSF assets. (See the ATO’s view here).
  • Allowing death benefit nominations to be typed into the trust deed so that they don’t expiry every 3 years.
  • Don’t restrict membership – there should be no restriction in your deed as to who can become a member – the rules change and you don’t want to miss out.
  • Don’t restrict contributions – old regimented deeds prohibit many classes of people from contributing to your Super. What a waste of time to put in such restrictions. The government, fearful of people running out of superannuation and collapse of the age care pension, are increasing the classes of contributors.

SMSF pre 1 July 2007

Since 1st July 2007, SMSF Deeds need updating because of:

  • “Plan to Simplify and Streamline Superannuation”, from 1 July 2007, once you turn 60 you can take out your Super tax-free, unless you Deed states otherwise (2007).
  • New strategies allow you to turn off and then turn on pensions. Some can be converted to accumulation mode. However, some trust deeds require rollovers be paid to other funds, even if you want to continue to hold them in your fund.
  • Account-Based Pensions and Transition to Retirement Incomer Streams were released in April 2007. Your deed must allow for their payment. Sadly, many older deeds don’t allow for them.
  • Compulsory cashing rules are mostly abolished, except for death. However, many deeds still enforce compulsory cashing.
  • Estate Planning – more people will now retain wealth in their Superannuation until their death. The Superannuation may well be lost to the wrong people or the tax man. Binding Nominations are required.
  • What if by mistake you put in too much money into your Super? Unless you can reject or return the excess funds you suffer a high tax rate. The deed must allow the power to reject and return funds.

SMSF pre 2006

Since 2006, SMSF Deeds need updating because of:

  • Thanks to the 2006 Budget SMSF deeds will become shorter and simpler over time. The pension payment sections of old SMSF Deeds are long and laborious. Such complexities are being phased out in the deeds. A lot of complex rules can be removed.
  • SMSF deeds less than 6 years old: Many SMSF deeds have a deeming provision to include all the new SIS rules. This helps. Sadly, these provisions operate only on those mandatory issues that SIS requires a SMSF to follow. What if a SIS change is not mandatory? What if the Deed applies stricter terms than required by SIS?
  • Since 12 March 2004 it has been considered courageous to operate a SMSF without a complying Product Disclosure Statement (PDS). The PDS contains everything that a trustee is expected to know. If you act for a SMSF (as an accountant, auditor, adviser or lawyer) and there is no PDS then the trustee has a higher chance in successfully suing you. This is based on negligence for your failure to bring everything the trustees needed that the trustee needed to know. The PDS protects the professional advisers as much as it protects each trustee from each other.
  • Contribution Splitting – Spouses can split super contributions between accounts or Funds. Your Deed needs to allow this to happen. (November 2005)
  • Your Deed should be able to permit minors (people under 18) as fund members.
  • What happens if a member is totally disabled? This can be permanent or temporary. You need to have a right to that payment. Power needs to be in the deed so that if a member is totally disabled, then the trustee can pay a benefit provided there are funds available from the member’s account or from the proceeds of the insurance policy.

SMSF pre 1999

Since 1999, SMSF Deeds need updating because of:

  • New market-linked pensions. (2004)
  • Interdependent relationships for beneficiaries. (2004)
  • Acceptance of government Co-contributions. (2003)
  • Changes to compulsory cashing of benefits rules.
  • Changes to contribution acceptance rules. (2004 – Changes to over 65 contribution and benefit payment rules)
  • Divorce and super splitting. (2003)
  • All members must be trustees. (1999)
  • When the Australian Taxation Office took over supervising the SMSF funds most deeds were updated – but not all. Without updates the concessional tax treatment may be lost. (October 1999)

SMSF pre 1995

For deeds last updated from 1995-1999 you need to address these additional issues (as well as the ones above):

  • Accepting your wonderful spouse as a member and for contributions. (1997)
  • Expanding the in-house asset rules to related parties. (1999)
  • Providing for complying lifetime and term pensions. (1998)
  • Binding nominations for death benefits (otherwise your son in the SMSF can direct your Super goes to him and not evenly to all your children). If you don’t have a “binding” nomination then the nomination form you sign merely expresses your wish to the trustee. The Trustee can decide who gets your super when you die. Sadly some deeds stop the member having any choice. (1999)
  • Full preservation of your Superannuation. No taking back out your undeducted contributions. (1999)
  • New regulation – ATO takes over looking after SMSFs.(1998)
  • Need to include complying term and life-time pensions. (1998)
  • Ensuring you get the CGT retirement component. Up to $500,000 can go into your superannuation CGT free from the sale of business assets. (1997)
  • The ever useful expanding of acquisition of asset rules to related parties. (1999)

SMSF pre 1994

Don’t point out the “old age” to your auditor. Just update it. You need the above plus:

  • Uses of Pensions or Corporations powers.
  • Election to become regulated.
  • Covenants by the Trustees.
  • Allowing you to adopt rules under the SIS Act for compliance.



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