Accountant: there should be no SMSF minimum start-up

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SMSF’s should have no minimum start-up amount imposed and it can be done with as little as $100, according to an accountant.
 
Peter Smith, director of Centenary Accounting Pty Ltd, contacted Wealth Professional in response to a February story about a law firm that insisted investors need a minimum of $500,000 to start an SMSF.
 
At the time, managing partner of Owen Hodge Lawyers, Rolf Howard, called any advice stating otherwise “dubious”.
 
“Many are touting a minimum of $250,000 is all that is needed. This figure is well short of the benchmark, in my opinion,” he said.
 
But Smith said this isn't so, and drew up an example:
 
An SMSF has $250,000 to invest in commercial building worth $600,000, so the lend is $350,000 from a bank or a member.
 
Mum and Dad investor receive $60,000 per annum in rent and make concessional tax contribution of $35,000 each per annum.
 
Ignoring the 15% tax on contributions and 15% income tax on rent, it will only take three years to clear the investment of debt, he said.
 
“There should be no minimum to start a fund. What is important is the soundness of your investment plan. A fund set up on 30 June can have $100, but the trustee knows someone has a lump sum coming from another source on 1 July. [This] may form the deposit for the purchase of an asset using the limited recourse loan rules, and the future cash flows all work well," said Smith. "The investment strategy is the key to setting up a fund usually, and provided that is viable as to income or capital appreciation exceeding outgoings, then it will work."
 
However it would be inappropriate to set up an SMSF if you did not have the capacity to make significant contributions over time or rollover an existing retail or industry fund to get started, he said.
 
“When things go wrong it is human nature to find a scapegoat, but often bad judgements on the part of the client or greed have led to wrong investment decisions, not the SMSF structure itself.”
 
Government departments and vested interests have tried to “strangle” SMSFs by imposing rules not required by other funds, Smith stated.
 
These include an audit ($300-$600 per year), a regular valuation of the assets, and the requirement to pay an actuary to calculate the pension if an investor decides to draw some of their own money, “even though the tax office website says a minimum of 5%”.

“The big end of town, including retail and industry funds, have a lot to lose if SMSFs continue to gain traction, and [the minimum start-up amount] is an unfair argument when they are not limited to the amount they can collect from members to restrict the creation of a competitor,” he said. “Vested interest has always found a way to compromise sensible logic.”
 
SEE MORE:
 

Huge leverage opportunity for planners

Lack of client engagement risky business for advisers

'Dubious' financial advice leaves investors short changed

 
  • Innocent Observer on 27/03/2014 2:53:50 PM

    Gee, it's not surprising PIS keep getting into hot water when they ARs like this drawing heat.

    Peter, if you're recommending strategies like the one you used in your example, you are playing Russian Roulette with their money. And Russian Roulette is one of those games that, if you play it long enough, you will eventually lose (in this case your clients will lose).

    But congratulations, I'll add this to my pile of "you won't believe what some advisers are recommending" anecdotes.

  • Jim on 28/03/2014 8:27:04 AM

    Innocent Observer, I think the point he tries to make is that the initial investment amount is not the best way to determine whether an SMSF is appropriate. I am sure that there are SMSF's with balances in excess of $250,000 which are entirely inappropriate.

  • Still Laughing on 28/03/2014 8:33:15 AM

    I love the way Peter mentions an SMSF needs a sound investment strategy and then jumps straight into talk about leveraging it all into one iliquid investment while hoping that future cash flows will 'work well'. Didn't you learn anything trough the GFC?

    This was good for a laugh on a Friday morning. Thank you Peter but perhaps you should stick to accounting and leave the investment strategies for professionals.

  • Adviser B on 31/03/2014 10:10:17 AM

    To bring up the importance of a 'sound investment plan', followed by suggesting HIGH debt and all into ONE asset (ie, NO diversification at all) is a bit hard to take seriously.

    And 'start up' funds include money that will be arriving soon. The example of starting with $100, and then a day later receiving an expected huge lump sum - that lump sum is considered part of the start up value, just like ordinary super starts with zero until rollovers arrive weeks later.

  • Innocent Observer on 1/04/2014 6:38:02 PM

    Quite possibly Jim, in which case he really needs to put some more effort into his anecdotes.

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