Real DIY super: How to keep SMSF costs super low

In this cost-of-living crisis many of us are considering how we can reduce costs across a range of expenses, including our financial expenditures.

Some self-managed superannuation fund (SMSF) trustees may be considering how much of their existing costs they might be able to bring ‘in-house’ and do themselves. If you are about to retire and are rolling back your work hours, you might have a bit more time on your hands which could be put to use administering your fund.

If you want to cut costs as much as possible, you could also consider investing your time in managing your fund’s investments, as this is where the real cost of ‘ultra’ DIY super lies. If you have time, you like investing and are perhaps a retired or semi-retired financial services professional, you could save significant amounts by doing many investment tasks yourself.

You also need to consider how confident you feel about important DIY documents standing up in court if you were ever challenged by a third party. There are significant penalties for making mistakes when running your SMSF so, if you don’t have relevant experience, it may be best to at least pay money for some document templates, rather than going it completely alone.

Administration

To run an SMSF as cheaply as possible, the key is to keep it as simple as possible. It would be best to avoid complex investments, such as investing in real property and borrowing to invest.

How you set it up will also dictate the cost. You can set up your SMSF with individual trustees or a corporate trustee but if you use a corporate trustee structure the Australian Securities and Investments Commission (ASIC) will charge a fee to register a company for the first time (approximately $597).

There is an annual review fee but that will be lower (approximately $65 a year) if the company’s only purpose is to act as trustee for your SMSF.

Trust deed

Every SMSF needs a trust deed to operate. It is a legal document and is required to set out the rules for how the fund will be established and operated. It needs to explain the fund’s objective and who can be a member. It also needs to specify what kinds of investments the fund will invest in and how benefits will be paid in retirement phase.

The Australian Taxation Office (ATO) stipulates the following around trust deeds.

The trust deed must be:

• Prepared by someone competent to do so as it’s a legal document
• Signed and dated by all trustees
• Properly executed according to state or territory laws
• Regularly reviewed and updated as necessary.

You can write your own trust deed, but you need to be reasonably confident that what you are writing would stand up when tested by a third party.

There are free templates available on the internet and you can also buy cut price services – from around $150 to $250 – that will help you set up a basic trust deed. In the Northern Territory there may be stamp duty payable on the trust deed but this is nominal.

SMSF supervisory levy

The ATO requires that SMSFs pay a supervisory levy of $259 in advance every year. New SMSFs need to pay double in their first year – the levy for the year in which they register and a year in advance. This is part of your annual statement from the ATO.

Audit

One task you do need to outsource to  a third party is your annual SMSF audit, which the ATO requires. The auditor you choose must be registered with the Australian Securities and Investments Commission (ASIC) as an approved SMSF auditor. Check the ASIC’s database of approved SMSF auditors.

The most recent data (collated by the ATO for the 2021–22 financial year) has average annual auditor fees at $628 with the median auditor fee at $549. While the median has remained essentially the same over the past five years the average has actually fallen.

Financial statements and tax returns

SMSFs need to provide an annual tax return to the ATO with the fund’s annual financial statement.

Like your personal income tax return, it is possible to complete your SMSF’s annual tax return yourself if your fund is not complex. The SMSF tax return form can be found on the ATO’s website along with instructions on how to complete it.

The ATO’s instructions are quite detailed, and walk you through each section of your return. It also includes a section on what’s new for SMSFs for the financial year which can help familiarise you with any new requirements, along with appendices to help complete more complex parts of your return.

Investments

Your fund is required by law to have an investment strategy that takes into account:

• The risk involved in making investments and their likely return
• The overall composition of the fund’s investments and their diversification
• Liquidity of the investments, in respect of the cash flow requirements of the different members
• The ability of the fund to discharge its existing and prospective liabilities.

An investment strategy can be a relatively simple DIY document. You can use our SuperGuide templates, included in the annual price of your subscription.

Once you have the investment strategy you can follow through and invest. The ATO reported median investment expenses for SMSFs in 2021–22 were $6,831 and average expenses were $11,609.

However, it is possible to do it much cheaper than those median costs if you have the time and knowledge to invest directly in listed assets. The cheapest way to do that is via an online broker where brokerage costs start at around $10–15 a trade for amounts under $10,000 and then go up to 0.1% of the trade for larger amounts.

Investing in managed funds becomes more expensive with management expense ratios for actively managed funds of between 1% and 2%. SMSFs have traditionally used managed funds for asset classes where they may not have the scale, such as infrastructure and commercial real estate, or where they do not have knowledge, such as international equities and global fixed income.

The good news is that there is now an extensive range of exchange traded funds (ETFs) or listed investment companies and trusts (LICs and LITs) available on the Australian Securities Exchange (ASX) or Cboe that offer coverage of these asset classes. They still have management expense ratios, but they are far cheaper than traditional managed funds and are a good way to diversify your SMSF investment portfolio. The outlaid cost is just the price of the ETF unit quoted on the exchange.

You could potentially get your investment costs down to $500 per year, or even lower, for a diversified portfolio of ten to 20 Australian equities and five to seven ETFs or LICs for diversification across international equities and other asset classes such as fixed income and infrastructure.

Digital financial advice is another option. Also called roboadvice or automated investment management, this is online advice based on a series of questions you answer about your attitude to risk and your investment needs. With the rapid development of AI, there is a growing list of digital advice platforms, with banks and financial advisers introducing their own services as wells. Digital advice services can range in cost from 0.5% of assets to 1%.

Roboadvice providers will suggest an investment portfolio and manage and maintain that portfolio based on your investment objectives.  Be aware though that some of the more expensive Roboadvice options use model portfolios and charge fees like those of managed funds.

Administration platform provider

Many SMSFs use an administration platform provider, which keeps track of their assets, investments and super contributions and can organise many of the services outlined above.

An administration provider can follow your SMSF’s tax liabilities and calculate how much of your super is taxed or untaxed, which is useful when you retire and come to withdraw your super or enter retirement phase. These platform providers charge annual fees, which will differ depending on whether your fund is in accumulation or retirement phase and how much of their service offering you use.

The 2021–22 ASIC data found that management and administration expenses for funds with larger balances (those potentially more likely to use a platform provider) ranged from a median of $2,926 and average of $3,983 for funds with balances between $500,000 and $1 million to a median of $7,498 and average of $17,138 for funds with balances in excess of $10 million.

You can also keep track of your investments, income, contributions received and more in an Excel spreadsheet. For this to suffice, the simpler the structure of your SMSF the better.

Administration platform providers may also notify you of changes in regulations and rules and help you work out what, if anything, you need to do as a result. But you can keep on top of these things yourself, by following the financial press and subscribing to services like SuperGuide. SMSFs are a growing and significant section of the superannuation industry and any regulation changes that affect SMSF trustees are promptly reported.

Total ultra-DIY costs

If we assume a corporate structure and that you pay for a trust deed template but complete your tax return yourself, costs to set up and run your fund in the first year (excluding investment costs) could be around $2,000 to $2,500. This amount would cover the ASIC registration fee, two years of the ATO supervisory fee, audit fee and trust deed template.

In subsequent years the annual administration cost could be as low as $1,000, again assuming you complete the tax return yourself and that the fund remains in accumulation phase.

Additional investment costs for a total DIY solution could be as low as $500 for a very simple fund in accumulation phase.

So total administration and investment costs could be as low as $1,500 per year for a no-frills DIY fund once the fund is up and running.

How does this compare to median costs? The ATO estimated the total median cost for SMSFs in 2021–22 was $9,104 compared with $1,500 for the no-frills DIY option.

More complexity

It is easy to get costs down if you are running a simple SMSF in accumulation phase. But what happens if you want to start a pension or borrow to invest in real property?

If your fund is in retirement phase you will also have a transfer balance account and be required to do event-based reporting. Your transfer balance account is a record of events that count towards your transfer balance cap.

If your SMSF is looking to borrow to invest (in property or other assets) you will need additional documentation. This can cost anywhere between $1,200 to $1,600 with an SMSF specialist lawyer but it is a complex arrangement and worth getting appropriate advice.

There will also be extra costs for assets such as derivatives and unlisted shares 

There is extra documentation involved in setting up a pension in an SMSF. Read more about how to start a pension.

A trustee letter, product disclosure statement (PDS) and pension payment agreement are required. An amendment to the trust deed could also be necessary. Assuming you could do some of this yourself – such as the trustee letter and trust deed amendment – basic templates for the other documents could cost $700 to $1,000.

If there are members in accumulation and retirement phase, an actuarial certificate will be required. Budget actuarial certificates can be obtained for $100 plus GST, but you do need one every year.

Another cost, thanks to the introduction of transfer balance caps and accounts, is the requirement for event-based reporting. This includes any events that have the potential to impact your balance.

All funds paying a pension must report events within 28 days of the end of the quarter in which the event occurred. This is done via a transfer balance account report and you can lodge these forms yourself via the ATO’s portal, potentially saving money but not time.

The bottom line

It is possible to establish and run an SMSF for much less than the ATO’s reported median costs. And if you have a simple SMSF in accumulation phase, you could save a lot of money by doing most of it yourself.

However, don’t forget there are significant penalties if you make mistakes, even inadvertently. There may also be non-financial benefits in paying for SMSF services for trustees who would rather be doing something else with their time.