SMSFs an ‘expensive status symbol’, says Tria
The SMSF cost statistics released by the ATO are “significantly understated” with their complexity often resulting in a number of hidden costs, claims Tria Partners managing director Andrew Baker.
Mr Baker said there was a “considerable rise” in the official average costs of managing an SMSF in the ATO’s 2012-2013 SMSF statistics.
He believes the rise in costs could be due to the fact SMSF tax returns were changed for the 2012-2013 year in order to collect all cost data, deductable or not.
Previously, Mr Baker believes the ATO was not collecting data for SMSF pension divisions in the annual tax returns it received since pension divisions are tax exempt and therefore costs are not deductable.
“As a result, these costs were just disappearing – a big deal given that a substantial portion of SMSF assets are in the pension phase,” he said.
While these costs are now being accounted for, Mr Baker said the ATO’s operating costs for SMSFs are still understated because they “don’t capture fees and costs in underlying structures such as trusts, and other investments that SMSFs make”.
“However, they are also overstated as they include deductions that would not be considered MER-style costs by APRA funds, e.g. interest, depreciation, and insurance premiums,” he said.
Based on taxation statistics for the prior year, Mr Baker said these account for approximately 30 per cent of SMSF deductions.
“Considering past taxation statistics, our view is that you would deduct approximately 25 per cent net from the ATO’s 2013 SMSF costs to create a reasonable comparison with APRA funds,” said Mr Baker.
Compared to the retail super funds or not-for-profit defaults, Mr Baker argued a super balance would need to be in the $1-2 million band before average SMSF costs are attractive.
“Equally, claims of SMSFs being cost effective at $200,000 are clearly rubbish, on average experience at least,” he said.
“At that level, average SMSF costs are two to three per cent – multiple of any major not-for-profit or retail simple super product, and equal to or higher than legacy retail products."
Mr Baker said the other issue is around what SMSFs theoretically cost and what they actually cost.
Older SMSFs, he said, are probably paying higher costs on average than newer SMSFs.
Adding in all the extras, he said “keeping in mind SMSFs are a complex product” also means the actual price can be much higher.
Mr Baker said SMSFs are therefore much the same as any other “expensive status symbol”, such as cars and air fares.
“The new data indicates that in many cases, when a member switches from a collective fund to an SMSF, their overall fees and costs go up significantly,” said Mr Baker.
“They may reduce investment costs, but often incur a raft of new accounting, administration, and regulatory costs that far exceed the savings they think they are making.”
Miranda Brownlee is the deputy editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.
Since joining the team in 2014, Miranda has been responsible for breaking some of the biggest superannuation stories in Australia, and has reported extensively on technical strategy and legislative updates. Miranda has also directed SMSF Adviser's print publication for several years.
Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.