Alternative to SMSFs
Editor
Latest posts by Editor (see all)
- DIY Commercial Property Valuation - March 2, 2014
- Controlling the Valuation Process - March 1, 2014
- Reducing Body Corporate Fees - February 28, 2014
Although our preference is to use self-managed super funds (SMSFs) as early as possible, there is a cheaper alternative to SMSFs that provides some of the benefits of SMSFs (but not all) and at a much lower cost, and it is worth mentioning as it may be appropriate in some circumstances.
To start off with, and to make the comparison more worthwhile, let’s look at the annual costs of running a SMSF using a low-cost SMSF provider such as esuperfund.
Annual tax returns and audit fees: $699 pa
Australian Taxation Office (ATO) supervisory levy: $259 pa
Australian Securities and Investments Commission (ASIC) annual fee for corporate trustees (optional): $44 pa
Bank Fees: Zero
Total fees: $1002 pa
Plus brokerage: eg. for a $5000 trade value is $19.95, for a $35,000 trade value is 0.12% or $42
So if you had $100,000 invested in this SMSF your fees would be ~1% of your total assets (plus brokerage fees, depending on how much/how often you trade).
The alternative to this is using an industry or retail super fund that has an option to invest directly in individual shares of your own choosing, this is becoming increasingly common as large super funds try to compete with the growing number of SMSFs.
As an example, let’s look at the Australian Super Member Direct Investment Option.
This is Australian Super’s self-managed investment option that allows members to get some of the control and choice of SMSFs by being able to invest in S&P/ASX 300 shares, exchange-traded funds (ETFs) and term deposits.
Here is how their costs compare:
Portfolio administration fee: $180 pa (with no administration work you have to do yourself)
Total fees: $180 pa
Plus brokerage: eg. for a $5000 trade value is $15, for a $35,000 trade value is $78.
So this works out to be 0.18% of a $100,000 portfolio (plus brokerage on top of this).
On a like-for-like fee basis then, the Australian Super option is much cheaper, though brokerage rates are much higher on larger value trades.
That being said, if you are to use this option you need to be aware of its restrictions and limitations – see this note below taken from the FAQ section:
“Are there any restrictions or limits on what I can invest in through the Member Direct option?
You need a minimum balance of $10,000 in your AustralianSuper account to invest in the Member Direct option. Once you’ve registered, the following restrictions and limits apply:
- You must keep a minimum balance of $5,000 invested in one or more of AustralianSuper’s other investment options and $200 in your Member Direct transaction account. Provided you meet these two conditions you can invest:The minimum amount you can invest in term deposits is $2,000
- as much of your remaining AustralianSuper account balance in term deposits as you like
- up to 80% of your total AustralianSuper account balance in shares and ETFs
- a maximum of 20% of your total AustralianSuper account balance in a single stock or exchange traded fund
- The minimum amount you can invest in term deposits is $2,000
- The maximum amount you can invest in a single term deposit is $5 million
- The minimum buy order you can place for stocks and exchange traded funds is $1,500 and the maximum is $250,000
- You can’t buy and sell the same share or ETF on the same day”
The key things to note from the above are that only up to 80% of your account balance can be in shares and ETFs, and that only a maximum of 20% of your account balance can be in a single stock or ETF at one time.
If you are young and prefer to be 100% in shares and ETFs or want to have a more concentrated portfolio with fewer stocks then this is not ideal, but it may not be that big of an issue depending on your objectives and circumstances.
It’s also worth noting that any term deposits purchased in this structure are not eligible for the Government Guarantee (Financial Claims Scheme) as they are not held on separate trust for each individual member.
In addition to this, for long-term investors you need to consider what else you cannot invest in using this alternative to SMSFs.
These include:
Small-cap stocks outside the S&P/ASX 300
Shares listed on international stock exchanges
ETFs from providers other than i-Shares
Term deposits from providers other than NAB and ME Bank
Index funds
Bonds
Hybrids
Options
Warrants
Unlisted commercial property trusts
Commercial property syndicates
Direct residential or commercial property
So while the fees are very low, and much lower than even the lowest-cost SMSF administrators, you need to consider this in the context of the restrictions and limitations that are present both now and for your future investing needs.
Further, if you were to start off using this sort of structure and then wanted to roll it over to a traditional SMSF, then you have to sell all your holdings and transfer in cash the value of your portfolio, ie. you can’t transfer individual stocks held in this structure over to a regular SMSF, which is not ideal if you are a long-term holder of particular stocks and don’t want or don’t plan to sell them.
Based on all of the above our view is that you should either stick to your industry or retail super fund, or start up a SMSF, and use this middle ground alternative only in limited circumstances.
*Disclaimer: We do not use esuperfund or Australian Super ourselves.
Editor - December 3, 2013, 7:51 AM
For completeness it’s also worth mentioning that even the low-cost SMSF administrators such as esuperfund can have some restrictions, such as what bank accounts you can use for your trading accounts, what banks you can use for property loans and what broker you can use for share trades.
So to be completely unrestricted in your SMSF ideally you would have a trusted and competent accountant do your SMSF administration at a similarly low cost, preferrably <$1500 pa – this is what we do.
Editor - December 13, 2013, 1:11 PM
Another thing to note is that whether or not you use a SMSF, industry and retail super funds do offer relatively cheap life and total and permanent disability (TPD) insurance, so keeping some of your super funds here is always useful for this purpose.