Rules of thumb are sometimes handy, but no-one expects them to be accurate, and such rough standards naturally infer variability.
One rule of thumb that has circulated in SMSF circles for years is that the bare minimum required to be able to cost-effectively run a fund is around $200,000. More than a guesstimation, the “bare minimum” figure was reviewed by the Australian Securities and Investments Commission (ASIC) in consultation with independent actuarial firm Rice Warner in 2013.
ASIC noted that it was in no way proposing to mandate a minimum threshold to allow the establishment of an SMSF, acknowledging the inherent variability of cost effectiveness due to individual trustee efficiency variabilities and the vast differences between fund costs that its study revealed.
In the short time since, SMSFs have continued to multiply and bloom — and concurrently efficiencies in SMSF administration software have developed. Combined with the competitive service market that has grown along with the increased fund population, this has allowed service and admin firms to spruik for lower balance SMSF business.
This was evidenced by the results of a survey conducted early in 2015 by Australian Unity Personal Financial Services of planners and accountants giving advice in the SMSF sector. While 51% regarded the minimum needed was between $100,000 and $200,000 (the rest cited greater figures), 21.4% said they would still be inclined to advise starting an SMSF at the lower minimum.
The latest Tax Office statistics on SMSFs reveal that nearly a quarter (22.3%) held less than $200,000 in assets, with a surprising 6.7% holding assets totalling less than $50,000.
In July, ASIC released a further guidance paper on SMSF cost effectiveness, but this time made a point of stating that the $200,000 rule of thumb should be considered a bare-bones minimum, and in limited circumstances, and in fact that the costs of establishing and operating an SMSF with a balance of $200,000 or less is in most cases unlikely to be competitive.
“In many cases, a recommendation for a retail client to set up an SMSF with a starting balance of $200,000 or below is unlikely to be in the client’s best interests,” the ASIC guidance said.
ASIC states that there may be circumstances where such a balance can be viable, but the trustee must be “willing to undertake much of the administration of the SMSF and the management of the investments” to make it cost-effective.
Len Reddoch has been a member of Superannuation Australia since 2001, and set up his own SMSF at about the same time. He is also an SMSF auditor and tax agent, and has about 100 SMSF clients and about 300 tax clients.
“The minimum in my opinion would be about $300,000,” Len says. “What you’ve got to remember is that a fund trustee will be paying anywhere between $1,600 and $2,000 to do the annual accounts. And then add another $450 for the annual audit. So we’re looking at about $2,500 to start with.”
He acknowledges that funds in the public sector will be a lot cheaper, but for SMSFs Len can’t see that anything less than $300,000 is viable. “And if you pay a financial planner, you could be up for $600 to $700 every month — and I know one trustee who’s paying that much.”
One added cost Len says his own fund has incurred has been changing from individual trustees to a corporate trustee. “But it’s a positive move, from an estate planning point of view. The annual cost is only about $100 for ASIC requirements, but it is a lot safer.” Len says of his SMSF audit clients, between 70% to 80% of them have corporate trustees.
Long-time Superannuation Australia member Walter Chelotti also provides services and advice to about 100 SMSFs, but his take on the issue is that nominating a hard-and-fast figure can miss the point somewhat.
“It all depends on a number of factors, which make it difficult to land on a minimum amount needed,” he says. “For example, a fund could be set up with only $50,000 worth of assets but with the knowledge that contributions and so on are assured to boost that balance. And although some costs are unavoidable on set up, ongoing costs can vary. When invested in cash only, for example, these are going to be minimal.”
Given however that there are unavoidable drains on resources, if Walter were pressured to nominate a minimum amount, he says there are of course realities to consider. “If I were pressed to commit, I probably wouldn’t start a fund with anything less than $100,000,” he says. “Of course you wouldn’t go in with $20,000… that would be ridiculous. There are so many factors at play, and it depends on the individual trustee, but certainly cost/benefit needs to be considered.”
New member Josie Boemi audits about 25 SMSFs each year, and says the $200,000 minimum figure is probably a reasonable amount but, like Walter, says this depends on the trustee’s circumstances. “If your entry amount is $200,000 and you know you can grow that, then it’s a viable figure,” she says. “But if you’re just going to keep that ticking away and not actively look for growth, then its probably not. You may as well be in a retail fund.”
Josie says it’s essential to look at the age of each trustee. “If you’re 60, maybe $200,000 is not a good starting point, but if you’re 30 you have a good opportunity to make it work.” She does not consider it relevant for ASIC or the Tax Office or any other regulator to mandate a minimum. “The point is, we should be free to make that decision,” Josie says. “But then again, I’ve seen accountants who have set up an SMSF for a client with a lot less, and they’ve obviously not really thought about it.”