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Are minimum balances necessary for an SMSF?

By Peter Townsend
September 28 2017
5 minute read
Peter Townsend
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We take a look at what the regulator has said about minimum balances, and what you need to know about the viability of small-balance funds.

Following shadow shopping and other surveillance activity, ASIC stated it was not satisfied that advisers recommending that clients go into an SMSF were giving the whole story. That is, that the client was being told everything they needed to fully understand and evaluate the advice, such as:

• need for investment strategy


• responsibility for the fund’s management

• limited access to external dispute resolution

• no access to statutory compensation for fraud or theft

• ability to access low-cost life and TPD insurance

• product replacement when rolling from APRA fund to SMSF

• managing SMSF requires time, commitment and skills

In particular ASIC stated its concerns about:

(1) aggressive marketing of investments (especially real estate) so that the performance of the investment was being enhanced by the use of SMSF without sufficient information being given about all the aspects of operating an SMSF

(2) the lack of industry consensus on whether a fund with less than $200,000 can be cost-effective when compared with APRA fund

Some other issues were also relevant including:

A. the difference between ‘limited service admin’ and ‘full service admin’ and therefore the time that the trustee must contribute to the administration of the fund and the opportunity cost of that time

B. the fact that everybody’s got to start somewhere and the issue might be exactly when you commence an SMSF (i.e. a low balance SMSF, which is expected to grow over a 2-3 year period, may well be appropriate for the client)

C. the fact that starting super in an APRA fund while benefits are low and moving to an SMSF when the benefits reach the required level ($200,000) comes with the cost of the CGT that could be payable at the time of the switch (subject to the member’s account being in accumulation phase and holding non-cash assets) so that if the early low balances of super had been held in the SMSF from the start, the saved CGT could be offset against the higher SMSF fees to improve the comparison with an APRA fund

D. the fact that it is only possible to invest in non-standard assets in an SMSF and the desire to use those assets (e.g. direct real estate)

E. that fact that gearing is only possible in an SMSF (The Rice Warner Report: “The size of the gross asset and its cash flows may be sufficient to justify an initial small [fund] size provided the returns are sufficient to support the excess cost and the cash flow into the fund is sufficient to service and pay down the debt in order to realise the investment value”)

F. the fact that a fund in pension phase with high annual drawdowns and ever-decreasing fund balances may be inherently inappropriate and may need to be reviewed, particularly at the $200,000 mark.

ASIC requires that the adviser set out clearly for the client, including:

1. The costs of setting up, running and winding up an SMSF

(1) ASIC requires that the following be discussed with the client AND set out in the advice:

A. likely costs of setting up, running and winding up fund

B. avoidable costs and unavoidable costs

C. annual operating costs of an SMSF vs client’s current APRA fund, and APRA funds generally

D. the cost of administration

(2) Six types of costs need to be discussed:

A. setting up costs

B. running (operating) costs

C. winding up costs

D. time (opportunity) costs

E. insurance costs

F. investment costs

(3) The costs should be described and quantified if possible

The price of a low balance fund: eternal vigilance

(1) The ongoing appropriateness of an SMSF, especially where the pension phase balance approaches the $200,000 benchmark

(2) Monitoring the achievement of expectations that warranted the establishment of a low balance fund in the first place and providing advice if those expectations are not met

(3) No reference in INFO206 to the 2-3 year period that Rice Warner suggested in their report. Doesn’t mean you can’t argue that point given ASIC’s reliance on the report

Can you set up a fund with less than $200,000? Yes!

2. What ASIC said:

(1) “… there are circumstances where an SMSF with a starting balance of below $200,000 may be in the client’s best interests. For example:

• where the trustee is willing to undertake much of the administration of the SMSF and the management of the investments to make it more cost-effective, or

• where a large asset (e.g. business property or inheritance) of funds in another superannuation account will be transferred into the fund within a short time frame (e.g. within a few months) after the SMSF is set up.”

(2) Where the adviser is recommending an SMSF with less than $200,000 balance, ASIC requires that the advice clearly set out:

• the circumstances that influence the adviser to believe the client is likely to end up in a better position despite the SMSF having a low starting balance (hmm, prediction of future return?)

• consideration of whether the SMSFs intended investment strategy is appropriate or viable (the only comment about return in the regulatory documents)

• the reasons why setting up and operating an SMSF is in the best interests of the client

(3) ASIC then provides a compliance tip: “We are likely to look more closely at advice to establish an SMSF … if the starting balance of the SMSF is below $200,000.”

3. The unspoken assumption:

(1) There is insufficient focus in the regulatory writings on return and the part that expected return plays in the decision.

(2) In particular all the statements about comparative cost and the size of expense ratios assume the same return.

(3) Reasonably likely return is the game-changer.

Ways around the $200,000 ‘soft benchmark’

4. There are ways around the issue:

A. Follow the guidelines in INFO206 to discuss, justify and record your justification for the recommendation.

B. Rely on the client’s stated desire to invest in direct property (or other assets not available via an APRA fund) - still need to make the investment case.

C. Rely on the client’s stated desire to leverage their position via gearing – still need to make the investment case.

D. Rely on the time frame by which the $200,000 benchmark will be met and the saving of CGT on the rollover (note the time period differences between ASIC [a few months] and Rice Warner [2-3 years]). There is no fixed standard. You’ll need to be able to show that the future returns in the SMSF will more than compensate for the higher costs and cost ratios in the early years.

E. Rely on the client’s stated desire to have tailored estate planning that is more flexible than can be offered through the limited options open to members via the standard death benefit nomination in their APRA fund.


Advisers need to find clear communication tools to speak to those aspiring SMSF owners who want control of their assets when the prevailing wisdom seems to see this as undesirable.

Advice is based on meeting client needs – even if that advice has to point out limitations on the desires/needs of the recipient. It must still meet that need in a qualified, professional way that helps to get the best retirement outcome for them.

Peter Townsend, principal, Townsends Business and Corporate Lawyers