An SMSF in 2023 — Is it time to make a move?

It’s the time of year that investors consider starting – or closing – a Self Managed Super Fund. Here’s what you need to know.

A common misnomer when it comes to superannuation is the belief that you need to have a SMSF to be able to buy individual stocks on the Australian sharemarket.

If your New Year’s resolution is to sort out your super, it may be time to start a Self Managed Super Fund – or review the one you have been running already.

When you think about self managed super, the first thing that comes to mind is generally the compliance and administrative hassles. Financial services regulator ASIC estimates that it takes around 100 hours per year to manage a SMSF. But in reality, this time requirement can be slashed by over 90 per cent by having the right financial adviser and accountant pairing to help ease the SMSF paper shuffle.

When choosing your SMSF dream team, look for professionals with efficiencies and automations to help minimise costs to the SMSF. For instance, does the investment platform used by the financial adviser have electronic integration to the accountants software?

Keep in mind too that when picking an SMSF accountant, the old saying of “you get what you pay for” rings true in many ways. If you do not have complex advice needs and are good at managing deadlines, then having a more “hands off” web based accountant may be appropriate.

But if you want to have a relationship with an actual accountant and work through ongoing issues such as contribution cap optimisation and income stream settings, as well as have an accountant who follows you up if you have not paid your annual ASIC company fee, then using a traditional full service accountant is likely to be a better match.

After you have determined the likely operating cost of your SMSF (which the ATO determined to be $3,923 on average in 2020), then you need to compare costs.

Most industry and retail funds have administration and investment fees ranging between 1 to 1.5 per cent of the account balance. On a $200,000 super balance it would be more cost effective in most cases to stay in a retail or industry fund and pay approximately $2,000 to $3,000 per year in fees rather than move to a SMSF and pay the assumed average of near $4,000 per year.

The point to make here is that since the operating costs of an SMSF are usually fixed (i.e. accounting, audit and statutory costs) versus the percentage based fees charged by retail and industry super funds; the more money you have in super the more likely it is that a SMSF will result in a net fee saving.

Next is to think about is whether you would actually benefit from the extra investment flexibility of an SMSF. A common misnomer when it comes to superannuation is the belief that you need to have a SMSF to be able to buy individual stocks on the Australian sharemarket. Many retail and industry funds allow you to buy stocks from the ASX 200 and many SMSFs are set up each year for the wrong reason.

SMSF specialist accountant Timothy Ricardo from Bishop Collins says: “People come to me with SMSFs and the only assets they have are a bank account and a share portfolio. In the absence of other reasons, they could have achieved the same outcome with a retail or industry super fund.”

However, one thing to check is whether your retail or industry super fund will allow you to participate in corporate actions such as a rights issue as not all funds provide members with this feature.

Direct property assets, physical precious metals and collectibles are some of the investments that can only be purchased via a SMSF. So if your retirement plan includes these assets, then a SMSF may be attractive.

Assuming you have satisfied yourself on the cost saving and investment flexibility aspects of a SMSF, the next step is to consider whether you choose an individual or corporate trustee. Although it is cheaper to set up a SMSF with an individual trustee opposed to a corporate trustee, it can create more pain in the long-run.

The ATO requires SMSFs to have more than one individual trustee. Therefore if a spouse dies under the individual trustee approach, the surviving spouse only has six months to replace the deceased spouse with a new trustee and update all investments with the new trustee details. Whereas if a spouse dies in a corporate trustee set up, then it is much easier to continue by simply removing the deceased spouse as a director of the corporate trustee. There is no requirement to have more than one director of the corporate trustee company in a SMSF.

ATO penalty units charged to SMSFs are also charged per trustee. Where the maximum penalty to a corporate trustee SMSF is $16,500, it can be an eye watering $99,000 penalty to a six member individual trustee SMSF. This is one of the strongest arguments in favour of having a corporate trustee.

The fact that there are usually 10,000 to 20,000 SMSF wind-ups each year indicates that many people conclude that an SMSF was not the right choice for them. Although there are many benefits in running your own super fund, professional financial advice is strongly recommended to ensure that you are setting one up for the right reasons.

James Gerrard is principal and director of Sydney financial planning firm www.financialadvisor.com.au