Mr Taxman
Change the way you feel about taxes.
Get informed and discover what the taxman doesn't want you to know.
Sharing it with Australia, Mr Taxman is a regular Woman’s Day columist and TV finance commentator
  • click to visit Mr Taxman on Twitter
  • click to visit Mr Taxman on FaceBook
  • rss

SMSFs can prove cheaper to manage, if the size is right

Jul 01, 2014

IT’S entirely erroneous to believe running a self-managed super fund is much more expensive than being a member of a super fund regulated by the Australian Prudential Regulation Authority, says Adrian Raftery.

Indeed, the investment specialist who became an academic has staked his PhD thesis on more than 209,000 tax returns provided by the Australian Taxation Office to prove that, if anything, SMSF management can actually be cheaper.

Using those filings and APRA’s statistics on the operating and management costs of the super funds it oversees, he says that “SMSFs enjoy economies of scale in relation to running costs, with the annual median cost being approximately half of those of industry and retail funds’’.

“I estimate, based on reasonable assumptions, that the potential lifetime cost-saving benefits could be as much as $304,000 for the average 35 year old working couple,’’ he says.

An accountant, auditor and ­financial planner, Raftery says he has devised a five-level cost matrix, depending on the complexity of the SMSF, and come up with numbers that make it clear big and simple SMSFs are significantly cheaper to run.

He is now a senior lecturer in financial planning and superannuation at Deakin University in Melbourne. “Most estimates of the cost of running an SMSF in the past have really amounted to nothing more than plucking a figure from the sky … or holding a finger up in the wind,’’ he says.

“It is ridiculous to suggest a simple dollar figure as the level (at which) an SMSF becomes attractive to operate. Not only do I look at the size of the SMSF and the number of members it has, I have analysed the actual costs incurred by these funds and tracked them in accordance with their specific investment strategy.

“If someone had a million dollars in their SMSF and put it all in a term deposit that rolls over once a year, then we would obviously expect that the cost of running that fund would be substantially lower than another similar-sized fund that had myriad investments such as properties, international shares and derivatives.”

His matrix suggests a $1 million fund, were it to be 100 per cent in cash and have two members, would cost only $1621 a year to manage. He admits that’s an unlikely type of fund and his numbers for similar sized funds with broader asset allocation look a lot more familiar.

In ascending order, he picks $7964 as the annual cost for a fund that’s 70 per cent cash, 15 per cent property and 15 per cent equities.

That rises to $8737 once the cash drops to 30 per cent, in line with common practice, with the balance being 35 per cent equities and 35 per cent property.

His most expensive category is for a 50-50 mix of property and shares, costing $11,777 a year to run ... or 1.18 per cent. Doubling the fund size to $2m, the cost rises to $19,108 or just under 1 per cent.

His complication is that, while SMSF costs come from the ATO, which oversees SMSFs, the pooled super fund numbers come from APRA. He admits there are “two pages of methodological differences between the way the ATO and APRA assemble their numbers”, but stands by his conclusion for the three fiscal years between 2008 and 2010.

Where he is quick to point to concerns is in low-balance SMSFs, whose costs, he says, are significantly out of line with conventional pooled funds.

“If I gave you $27,000 and told you that you could invest it anywhere you want but you need to pay me between $2000 and $3000 each year in administration costs, I doubt that you would take up the offer,’’ he says.

“But, surprisingly, my results find that is exactly what the bottom 10 per cent of SMSF members are doing”.

Where he is even more careful is on the knotty issue of the relative performance of SMSFs and pooled superannuation. A recent report by NAB noted that, over an eight-year period, SMSFs had outperformed pooled funds by 22.5 per cent, again using APRA and ATO numbers.

Raftery declines to draw a conclusion because of what he sees as a missing element in the SMSF numbers. “The data I received from the ATO does not necessarily report any unrealised losses on investments held, which is required to give a true reflection of investment return,’’ he says.

And he adds: “Aside from the running costs, it would be wise for potential SMSF members to also factor in the time required to both actively monitor their SMSF investments and ensure the fund complies … with the SIS Act.”

Originally published in The Australian on 1 July 2014 SMSFs can prove cheaper

 

Tags: Financial PlanningPensionsSMSFSuper

Author: Andrew Main

Comments

Post a New Comment

Media Availability

Are you interested in booking Mr Taxman for a speaking engagement or requesting his viewpoints for an article?

comments-rhsLatest Comments

  • "I GAVE BENJAMIN DOUGLAS A CHANCE TO FAIL JUST LIKE OTHERS : BUT HE PROVED ME WRONG BY GRANTING ME A LOAN [email douglasloanfirm2@gmail.com] Its really teeming with scammers on the internet..."

    By: linda at Aug 15, 2018 10:39PM

    Post: The secret to getting your loan approved

  • "INSTEAD OF GETTING A LOAN,, I GOT SOMETHING BETTER Get €5,500 Euros every day, for six months! contact Mrs Juilana on atmhackers3321@gmail.com, for more info about how this works... See how it..."

    By: Jeremy at Aug 15, 2018 1:21AM

    Post: The secret to getting your loan approved

  • "Hi Mr Tax Man, I have a HECS (HELP) Loan and also a supplement Loan, I cannot find information anywhere that tells me if I have to pay them both back *so under the new threshold is it 2% for each..."

    By: Emma at Aug 12, 2018 9:53AM

    Post: Two important dates for those with HECS/HELP debts

  • "My partner and I have had an investment property in the past, but have now sold it. Because my tax is simple nowadays I was going to do it myself.The problem is that my partner has a separate..."

    By: Shane at Aug 02, 2018 4:38AM

    Post: Marriage

  • "Hi, I work as a consultant an often visit a number of different offices. I drive to the train station and catch the train to the client office/s. Am I able to claim the car trip or just the train..."

    By: JB at Jul 30, 2018 1:46AM

    Post: Claiming car expenses