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“Free Offer” chaos in the SMSF market

If you have been considering establishing a Self Managed Super Fund (SMSF) with a low-cost SMSF administrator, you may find that the SMSF administration market is inundated with “free” offer claims. When you are surrounded by these “free lunches” having a sceptical mindset and being alert to any possible pitfalls is always helpful. Some important questions you may ask yourself before you sign up are, is this really free, as it is claimed? What are the terms and conditions? Are there any hidden costs? What are the costs that I can save just by simply doing the work myself?

To answer these questions, first and foremost, it is important to be familiar with a breakdown of various costs in running an SMSF. Some costs are unavoidable, irrespective of which administrator you choose. Additionally, some free claims are actually pre-conditioned. We have summarised some common “free” claims in the market and examined whether these administrators are really as generous as they claim.

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Claim 1: Free SMSF setup

If you are just setting up your fund, you will need to pay a setup fee. According to a Rice Warner report, commissioned by ASIC, 'Costs of Operating SMSFs’, establishment costs for new SMSFs are anywhere between $345 and $990.

Many SMSF administrators are now offering a ‘free new SMSF setup’ offer. While this sounds very enticing, you still need to exercise caution to check the following two potential pitfalls:

1. Any there additional fees that may apply?

The setup process usually includes the registration of your SMSF with the ATO, the preparation of the SMSF trust deed and the investment strategy. However, additional costs may be incurred and these costs are normally NOT included in the free setup package. Unfortunately, most of the administrators fail to disclose this important information. The two common additional fees that may apply are discussed below.

a. Company Trustee setup fee (where applicable):

When setting up an SMSF, you can appoint either individuals as SMSF Trustees or a Company as Trustee. If you elect to have a Company as Trustee for your SMSF, the cost of establishing the company, if you have not already done so, is approximately , which is predominantly an establishment fee payable to ASIC. In addition there is an additional annual ASIC fee of approximately . These fees can be avoided by using Individual Trustees for your SMSF. We have listed some considerations in choosing between Individual Trustees structure and a Corporate Trustee structure here.

b. Investment fees

When you set up an SMSF, you can invest in a range of different investments. It is important to understand that fees may be incurred when investing your super benefit, including but not limited to, brokerage fees, when investing in shares and property purchase costs, such as stamp duty and borrowing costs, when investing in property. Information about investment fees can be typically found by reading the product disclosure statements and terms and conditions of the relevant investment, where applicable, or by contacting the product provider directly.

2. Do I have a cooling-off period?

Not really! With a handful of SMSF service providers, receiving their “free” setup package means that you have to use their annual compliance service, or the package itself has already been included as part of the annual fee. This means, if you choose to opt out when you receive the setup package, you are obligated to reimburse the setup documentation fee, or in some cases, the first year annual fee.

With ESUPERFUND, it’s a different story.

The free SMSF setup documentation is not part of our annual fee. It is not a pre-condition to sign up with us. In fact, when you receive the "setup package" to setup the SMSF, you will have one month to review the documentation, including the SMSF trust deed, and can cancel the application at any time, at no cost to you. Alternatively, if you wish to proceed with establishing the SMSF, you simply need to sign and return the "setup package." It could not be easier or fairer! View the details of our special free offer here.

Want to know more about an SMSF and how we can help? Click here to get our Free Info Pack.

Claim 2: Free first year annual fee

You are required to lodge financial statements and a tax return each year with all SMSF's. Based on the Rice Warner report, you could be forking out up to $7,000 per annum, at the top end of the marketplace. In addition to the financial statements and tax return, it is compulsory for your SMSF to be audited annually by an independent auditor. This means you would be $300 to $700 out of pocket, every financial year.

Choosing a low-cost SMSF administrator means you may save a lot in super fees. The icing on the cake is that there are a few SMSF service providers, which are “generous” enough to offer the annual compliance service free of charge for the first year. But wait, does it not sound too good to be true? Consider the following:

1. Unavoidable cost

First of all, the ATO charges an annual levy of $259 for each SMSF. This annual ATO levy applies to all SMSF's and therefore the annual ATO levy cannot be avoided, irrespective of which provider you choose to administer your SMSF. This cost is generally not covered in the annual administration fee, payable to your SMSF administrator.

2. Extras

Some attend to the required annual compliance, in other words, tax return and audit, for free, but be cautious, as you may be billed separately for other services like the merger of pension and accumulation accounts, preparation of business activity statements, contribution fees, exit fees, binding death agreement and rollover documentation. Undoubtedly these can add costs on top of the annual fee.

Avoid extras?

Yes, there is a way, if you choose a service provider that has a fixed fee structure and one that clearly distinguishes the free and the charged items. For example, with ESUPERFUND the above extras are all covered in the fixed annual fee of . Click here for details.

3. Pension fees

If you will be paying a pension from your SMSF you could be charged with hefty sums. There will be costs for commencing the pension, commuting the pension and segregating the assets.

The good news is that the establishment and compliance costs of pensions are absolutely FREE with ESUPERFUND. This means that we attend to your pension commencement, merging of accounts, annual pension compliance and calculation of minimum and maximum pension payments for free.1

Final words

Free offers – everyone likes them. However, bear in mind that while you are taking back control of your super, make sure you are taking control of the costs too. Do get an idea of all the costs involved upfront and make sure that there are no surprises at year-end. The bottom line is that the buck starts and stops with you.

Before you start

An SMSF can be a great vehicle to take back control of your Super but an SMSF may not be right for everyone. We have conveniently summarised other factors to consider when contemplating setting up an SMSF here. We also assist you in understanding what is involved in the ongoing management of your SMSF via our Free SMSF Learning Centre here.

If you want to learn more about SMSFs, download an information pack today.

1. Please note that in some cases, an actuary certificate is required and the cost of an actuary certificate is not included in our annual fee.
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