Running your SMSF
- Trustees have three basic choices for SMSF administration
- Online and specialist services are more cost effective
- If your current approach is accountant and shoebox, consider switching
Joseph Schumpeter, in Capitalism, Socialism and Democracy, coined the term ‘creative destruction’ to describe the way in which development arises from the breaking down of a prior economic order.
It’s an apt description for the SMSF administration landscape, where a growing number of options have risen to replace the traditional choice: the accountant. SMSF trustees have benefited greatly, with both trustee workload and annual costs falling dramatically.
Trustees now have a range of choices from discount online administration providers right through to large institutions, each with their own ‘bells and whistles’. But which option is right for you?
When it comes to helping them manage their SMSF administration – accounting, audit, tax and ongoing compliance obligations – trustees have three basic choices: an accountant, an ‘online SMSF administrator’; or a ‘specialist SMSF administrator’.
We haven’t mentioned financial advisors because we’re focusing solely on the administration. Advisors typically don’t do this themselves; they also rely on one of these three options.
A key difference between the choices is the use of technology and price. Price will often dictate the option chosen but it will also act as a guide to what you can expect in the way of the services included.
There are four key components to SMSF administration:
- Processing – getting the fund’s transactional data (eg bank statement data) into an accounting system and producing a set of accounts, member statements and tax return;
- Review – reviewing the accounting system’s output and identifying and rectifying compliance, accounting and tax issues for the SMSF trustee (as well as arranging and project managing the audit process);
- Trustee interface – the ability of the trustee to access data on the SMSF’s investment portfolio, pension payments and other key information; and
- Strategic oversight – providing support and regular assistance to the SMSF trustee during the course of the year so that all of their opportunities are maximised and any threats highlighted and mitigated where possible.
Table 1 shows what each option gives you, in terms of these components.
Each of these components bears a cost, and the total price of the administration service will be the first indicator as to which of the above inclusions you are getting. The processes used by accountants can be overly manual (making them more expensive) and in a lot of cases your fee will be reflective of the manual processes and the lack of automation in the accountant’s practice. While this is gradually changing, it’s a key reason why many accountants no longer cut it from a cost perspective.
Let’s consider each of the options in detail.
The family accountant has been the traditional choice for administration, through a year-end manual process. While this is gradually changing, we suspect there are very few SMSF trustees who are choosing to use an accountant on the basis of cost or ease of accessing key information.
The more typical situation is that SMSF trustees are using their accountant because they value the relationship, the accountant looks after their overall affairs, or simply because it’s what they’ve always done. This is fine, but it’s worth keeping in mind that the extra $1,000 to $3,000 (or more) you spend each year (and every minute spent chasing your latest asset allocationThe way you spread your portfolio among different types of investments (asset classes). For example, if you had $10,000 to invest you might decide on an asset allocation consisting of 50% term deposits and 50% shares. or pension account balance) is the cost you bear for this approach.
If there’s no history (for instance, if you’re just setting up a SMSF) we wouldn’t recommend using an accountant for the administration unless, for instance, you’ve got a very simple fund and an acquaintance happy to do it on the cheap.
The benefit of online administrators is that they’re cheap. For example, ESUPERFUND at the moment will do the set-up for free, give you your first year free and then do your accounts, audit and tax return for $799 a year.
The basic online administrators will often impose restrictions on the investments you can hold or who you use as your bank or broker. This simplifies the processing and enables them to earn commission (the key reasons why they can offer such a low annual cost).
Where funds don’t fit into their ideal business model they may be allowed to do things differently, but at an extra cost. If you’re considering an online administrator don’t be fooled by the headline fee. Make sure you’ve taken into account all the fees and costs that will apply to your SMSF.
Apart from the restrictions (which won’t bother many people) and additional costs, the main negative associated with this option is the lack of support and oversight. If you want to know what to do to start a pension, or minimise your tax bill, you’ll need to work it out for yourself (or ask us). You may not even be able to get someone on the phone (if everything’s done online).
This lack of support and oversight is one of the key differences between the online and specialist administrators. The question for you is whether it’s worth paying the extra?
As a rule of thumb, the smaller your fund, the simpler your investments and the more hands on you are (both financially and in terms of technology), the more likely you’ll be able to get by with a basic online service. But if you’ve got a large fund, want to look at more complicated investments and strategies, or prefer the comfort of knowing there is human oversight of your fund, then you might need to go with a specialist administrator.
Specialist administrators (for instance, Heffron, Cavendish, Super Guardian and now, Eviser Admin) are more of an alternative to the traditional accountant. You get the cost benefits of efficient data processing and online access to your fund’s details, but you’ve still got access to help if you need it and the extra layer of review.
For instance, if you do something unusual with your contributions, you’re likely to get a call to help make sure you don’t end up with an excess contributions tax notice or claim a tax deduction that isn’t available. There have been examples where those using online only providers are first made aware of a contributions cap breach when they get a letter from the ATO.
Specialist administrators cost more than the basic online providers – fees are typically between $1,500 and $3,000 – which is the price of having the extra flexibility and a person looking after you. Again, make sure you assess the cost for your fund. Super Guardian, for instance, uses a volume based pricing model, so if your SMSF has a large number of investments you could find yourself paying $4,000 a year or more.
One thing often overlooked by SMSF trustees is the level of oversight applied to your accounts and tax return. Specialist administrators will do a review, whereas online only services will rely on the strength of their data processing and send you the documents produced by their system sight unseen.
The difference is subtle but important: you’re missing a layer of review. This might be appropriate for a simple fund but some won’t be comfortable with this arrangement. Remember, as trustee you’re on the hook for your SMSF’s compliance.
Weighing up the options
In the choice between online and specialist, it mainly comes down to how much the personalised service and extra flexibility is worth to you – which comes down to how proficient you are (or how much help you’re already getting) and the size of your fund. If you’re completely on top of the rules and strategies on contributions caps, or you’re running a small fund with contributions well inside the caps, then you might not value the help or oversight you’ll get from a specialist administrator.
Choosing between an administrator and the traditional accountant (and shoebox) arrangement is a slam dunk win to the administrator if non-financial factors are disregarded. But keep in mind that some accountants are starting to adopt the online services themselves, acting only as a strategic advisor, rather than an overly expensive transaction processor.
We’re not looking to bash accountants (after all, one of us is a Chartered Accountant), but we want to emphasise that the traditional model of junior staff working through all the paperwork, followed by a review by a senior, is a terribly inefficient model. There are plenty of people out there paying $5,000 or more for highly manual administration with no access to up to date information.
The final point is that the best choice for you might also be a function of your stage of life. You might be quite comfortable with E-superfund or Xpress Super when you’re in your thirties, with a relatively small fund investing mainly in listed shares. But as you get older and wealthier, switching your fund to a specialist administrator might be a better bet.
Whichever way you go, be sure to pick the option which gives you the service you need at the lowest possible cost and regularly review whether you might be better off elsewhere.
Ben Smythe is a principal of Smythe Financial Management Pty Ltd (www.smythefm.com.au), a corporate authorised representative of Financial Professional Partners Pty Ltd (AFSL 466050). This article is a general information article and to the extent it contains any financial advice it is general advice only. We recommend seeking personal advice on your own circumstances.
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