Latest SMSF statistical report highlights growth but also the need to greater reform

As we progress (albeit slowly) towards industry reforms with the superannuation sector, it is somewhat timely that the Australian Taxation Office has released their latest statistical overview of the SMSF industry, providing details of the 2009-10 financial year.  This statistical report now in its third year of data was first published as part of the Super System Review by Jeremy Cooper, which debunked many of the myths surrounding SMSFs and demonstrated that the industry as a whole was fairly robust and well-managed.

Download the ATO’s Self-managed superannuation funds: A statistical overview 2009-10.

Many of the statistics regarding the growth of the SMSF industry are now well-known as the sector appears to grow from strength to strength.  The more pertinent data when reading this review is the impact of Government policy, ongoing consumer confidence in financial markets (and Government), the important role of advice and specialisation within the sector.  Much of what I discuss below focus on these key themes.

The impact of Government Policy

SMSFs were arguably the biggest loser from the Labor Government’s decision to halve the concessional contribution cap in 2009-10.  Not only were contribution inflows impacted, but it most probably SMSF members who were hit the most in the significant rise of excess contributions tax assessments for the financial year as well (up 296% on the previous year).

The need for greater certainty with concessional contributions is important for the sector going forward.  With the transitional period for those 50 years of age and over ending at 30 June 2012, these individuals need clear direction from Government about planning contributions for 2012-13.

The demise of the corporate trustee

The continued growth in the use of individual trustees is a concern, with 90.13% of all new SMSFs established with individual trustees in 2009-10.  Unfortunately, this alarming trend has probably arisen from the highly competitive nature of the SMSF administration/accounting market.  With some administrators offering free SMSF establishments, this enticement to the market appears to be coming at a cost: the cost of advice!  Individuals appears to continue to setup SMSFs without knowing or understanding the differences/limitations in the different trustee structures.

It was acknowledged by the Cooper Review Panel that a corporate trustee was a far superior trustee structure, so it staggers me why individual trustees continue to grow.

Pension Phase

It is very apparent from the statistics that a growing proportion of SMSF members are moving to retirement phase.  55.7% of all SMSF members are now at an age (55 years and above) where they could draw an income stream from their SMSF, whether as an Account Based Pension (ABP) or Transition to Retirement Income Stream (TRIS).  The statistics show that 34% of SMSFs are paying a pension to at least one member; even more interesting is that this proportion of SMSFs actually represent 52% of all fund assets.  This would account for a significant amount of tax revenue (and growing) forfeited by Government due to policy in providing tax exemption within pension phase.  Add to this, tax-free pension payments from age 60, you must wonder about the longevity of the current policy with retirement incomes.

Whilst the statistics have traditionally had members being within the SMSF system for anywhere up to five years prior to drawing an income stream, this trend is shifting, with many new SMSF entrants commencing the payment of pensions in the first year of existence.

The growth in the payment of pensions is seeing the ATO take a greater interest in the area across several fronts including education and enforcement.  A new ATO publication on SMSF pensions (due out in July 2012), the finalisation of TR 2011/D3 (April 2012), and a focus on Exempt Current Pension Income (ECPI) with the 2011-12 compliance program, means we will expect more and more activity from the Regulator in this space.

Asset ranges & fees

They say that “size does matter”… although its not always the determining factor when it comes to SMSFs.  There is however a trend showing a reduction in lower account balances and growth in higher account balances.  It appears that education and the role of advice may be playing a role in people deciding to set up SMSFs.

The average expense ratio within SMSFs continues to decline, down to 0.54% in 2010 from 0.69% in 2008.  However, this is likely to be distorted by the growing number of SMSFs moving to pension phase where deductions are required to be proportionately reduced by the exempt income percentage applicable to the fund.  This issue has been recognised by the ATO, with changes expected to the SMSF Annual Return to capture both deductible and non-deductible expenses.

As the industry grows however and technology plays a greater role, we will continue to see the operating costs of SMSFs go down.  Due to the typically lower volumes of SMSFs per tax agent, the industry does appear to have a very slow uptake in technology advancements to become more efficient.  The statistics also show progressive decreases in SMSF auditor fees, a reflection of a growing number of specialist auditors starting to build streamlined and efficient businesses to handle high volumes of audits each year.

SMSF Assets

Interesting to note that the number of SMSFs with more than $1 million of assets has grown from 19% in 2006 to 26.7% in 2010.  The industry continues to see many new SMSF entrants coming from industry and retails funds with sizeable balances.  Even with volatile global financial markets during this time, SMSFs have continued to build their average and median total assets.

Investment Performance

The traditionally high proportion of cash and deposits held by SMSFs augured well during the GFC, however in a year where markets bounced back positively, the SMSF industry was generally outperformed by APRA regulated funds.  See comparison table below for 2008, 2009 and 2010 financial years between SMSFs & APRA regulated funds:

When looking at the Return on Assets (“ROA”) for the 2010 financial year where markets rebounded, the rate of return achieved on average per SMSF increased progressively across the asset-range bands, with 8.90% achieved on average for funds with greater than $2 million.  This compared with a -8.64% average ROA for balances under $50k.  This can be seen in the chart below:

In my view, the statistics reflect an an emerging industry, with some areas of compliance still a concern as with a greater need for competency across professional services including financial advice, accounting and the approved auditor functions.  With both the Future of Financial Advice (“FOFA”) and Stronger reforms intending to impact the quality of advice and competency requirements for these industries, I think it will be fair to say the landscape will look significantly different when reviewing the statistical summary in 5 and 10 year’s time.

For SMSF trustees, these statistics and the recent SPAA/Russell SMSF survey highlight a lack of confidence in current market conditions and also in the ever-changing nature of Government policy with superannuation.  In addition, a focus on mainstream media for advice (52% of respondents in SPAA/Russell survey), means many people may end up like a “deer in headlights” if issues arise through the lack of advice.

However, I do think it is an exciting time for the SMSF industry, and these statistics continue to prove it…

New ATO Statistical Overview released… good for the industry, but more to be done

The ATO Statistical Overview shows SMSFs growing from strength-to-strength, however more statistical information is required to better understand behaviour of trustees/members

As previously announced over a month ago on thedunnthing blog, the Australian Taxation Office has yesterday released an updated statistical overview into Self Managed Super Funds for the 2008-09 financial year. This report is an update to the Statistical Summary prepared on the request of Jeremy Cooper, Chair of the Super System Review.  He used this report as part of Phase Three to debunk many of the myths surrounding SMSFs and ultimately conclude that the SMSF sector was in fairly good shape.

A recommendation of the Stronger Super reforms is to improve the statistical information available of SMSFs to better understand the sector.  The ATO as Regulator is in the best position to provide this reporting through the information they gather each year in the SMSF Annual Return and fund establishment process.

This report provides us with a greater insight into SMSFs than the quarterly statistics issued on SMSFs, so the updated report is well overdue for the industry.  However in my view it needs to be expanded further to better understand all the elements within the SMSF life-cycle.  Unfortunately, with the need for greater statistics comes the need for trustees and SMSF service providers to collate and report this information.  The issue of cost in improving this statistical data is a potential impairment for the Government.

There has already been some positive talk from this statistical overview about the sector’s growth, both in the number of funds and also in total super assets.  SMSFs have moved from being a retirement vehicle for baby boomers to a retirement vehicle of choice for those individuals who wish to become ‘engaged’ in their superannuation savings.  As a result, we are seeing significant growth in the 35-54 age demographic setting up SMSFs.  This is in my view a collective of factors including greater engagement, coupled with improved financial literacy, greater investment choice (including the ability to leverage investments), along with the having an adaptable retirement savings vehicle that moves as individuals move employment.

Disappointingly from these statistics, we see no break down in the contributions, in particular member contributions that are provided as off-market or in-specie asset transfers?  This information is readily available within the SMSF Annual Return.  By not providing this information, I believe it has impacted the ability for the SMSF industry to put forward a valid argument on the Stronger Super reforms recommendation to remove listed shares from related parties exception (s.66, SISA) from 1 July 2012.  The reality is the Government has responded to a Cooper Review recommendation to ban off market transfer of listed shares on ‘hear-say’ stories of the industry (whether true or not).   In my view, I think it would be valuable to not only look at contributions to SMSFs at a macro-level, but also understand how these contributions got into the fund, e.g. as business real property or listed shares transfers.

The statistical report also shows the continued growth in SMSF net flows (total contributions and benefit payments).  The statistics support that not only did the Simpler Super reforms provide an incentive to get money into super, but the draw down benefits (in particular post-60) have meant we are seeing a growing percentage in the benefit payments taken each year.  The popularity of Transition to Retirement would also be attributing to the increase in benefit payments.  However, a macro-view is taken to benefit payments, rather than providing information on how these benefits are being withdrawn, either as lump sum or via income stream (such as account based pension).  I believe, providing greater information in this area will help the industry and Government better understand the direction retirement income stream policy needs to be taken in the future.  It would be good to be able to identify whether on average, members are ‘living beyond their means’ and how that will influence how long their money will last against average life expectancy, etc…  The issue of longevity risk would be the number one emerging issue in superannuation right now.

A few other areas of note from the statistical overview:

  • It staggers me than only one in every ten new SMSFs established are within a corporate trustee;
  • SMSFs whilst growing in the area post-retirement benefits, very few establish funds and commence income streams immediately (only 11%).  49% of funds commencing pensions within 2009, had been in existence for 5 or more years;
  • The concept of a ‘family fund’ doesn’t appear to be gaining traction… only 4% of funds have 3 or 4 members;
  • The entry point for SMSFs appears dropping in more recent times.  Growth has occurred in all ranges up to $500k.  This may be due to performance dissatisfaction as a result of financial markets – historically the number of new SMSFs have grown in poor financial markets.  Conversely, there has been an asset size decline in member balances >$500k.  This will have come about from a variety of reasons including the impact of GFC coupled with an increasing trend in benefit payments; and
  • SMSF Trustees appear to have taken an active response to their investment strategy as a result of the GFC, with a move to cash and term deposits.  Holding of real property has also grown which would incorporate the law changes to allow limited recourse borrowing from 24 September 2007;  It will be interesting to see in future data, when SMSF trustees look make that shift back into listed equities;
I will provide a detailed analysis on the impact of SMSF service providers in this report in the coming days… these statistics on tax agents, and auditors are quite interesting when looking at a fund’s overall operating expenses.  I’ll be providing my thoughts and views on this area, in particular the evolving role that technology (and greater competition) is appearing to play.

View the ATO Statistical Overview 2008-09.

Government’s Stronger Super response creates unfair advantage with off market share transfers

Removing the ability for an SMSF to undertake off market share transfers provides an unfair advantage for APRA Regulated Funds.

It is just over two years since the Super System Review chaired by Jeremy Cooper got underway. Yesterday (21 September 2011), after lengthy consultation with the Stronger Super Peak Group, the Government via Minister Bill Shorten have made decisions on key aspects of the Stronger Super reforms.

Self Managed Super Funds were one part of a broader review in the governance, efficiency, structure and operation of Australia’s Superannuation System.

For SMSFs, many of the recommendations from the Cooper Review were endorsed by the Government in their response back in December 2010.  Further information about the Stronger Super response can be found in previous posts and training sessions:

I along with many within the SMSF industry have been vocal against the recommendation made by the Cooper Review Panel to remove an SMSF’s ability to receive in-specie contributions or in-specie transfers of listed shares (see my previous post, “Cooper Review Panel off the mark with off market transfers”).

The recommendation made by Cooper was that “… where an underlying market exists, all acquisitions and disposal of assets between SMSFs and related parties must be conducted through that market.” The Federal Government in their Stronger Super response in December 2010 supported this recommendation.

Through the consultation process of the Stronger Super reforms, the appointed SMSF Working Group strongly objected to this recommendation. Furthermore, several professional bodies, including SPAA put forward a framework in which to address the concerns raised by the Panel around potential abuse of contribution caps and capital gains tax. This framework should have resulted in a similar outcome that was finally resolved with SMSFs investing in collectables. It is my understanding discussions were very positive that an appropriate framework would be resolved to allow for off market transfers to continue. These discussions have obviously ended disappointingly for many, with the Peak Group (excluding SPAA) ultimately supporting the recommendation to remove the SIS section 66(2) exception.

The statistical summary into SMSFs was a positive step for the industry as it debunked many of the myths around SMSFs – that they were full of Ferrari’s, artwork on people walls at home, etc… Unfortunately, I think that this change has been made on “hear-say” rather than statistical justification. Only in recent times has the SMSF Annual Return captured in-specie transfer information. I’m still unaware of any compelling data that justified this decision against SMSFs.

A more sensible approach would be to adopt a set of industry based guidelines to legislate on the issue for all superannuation funds to ensure that there is no manipulation of contribution caps or capital gains tax.

I feel that it’s important to keep lobbying on this issue to ensure that there is an even playing field for SMSFs and listed shares.

Are we making a mountain out of a SMSF collectables mole hill?

There has been a significant amount of discussion and debate in recent times about the draft regulations introduced for collectable investments within SMSFs to take effect from 1 July 2011.

In more recent times, I have been reading about the concerns of increased costs as a result of changes to collectables being held within SMSFs.  How quickly these people forget that the Cooper Panel recommendation was to prohibit the acquisition of collectables and personal use assets.

As part of building “integrity” into the self-managed super fund sector and breaking the shackles of past stigmas, changes to the ability to hold collectibles represents a positive step forward for the industry.  Where collectables and personal use assets represent 0.1% of a $430 billion industry, you would think the level of press on these matters meant more than a quarter of all SMSFs were invested in collectables!!!

Whilst concerns of additional compliance costs are valid, they are the reality of the future of SMSFs when it comes to improving the system’s integrity.  This is not an area being singled out by the Stronger Super reforms; take for the example the proposed future prohibition of acquiring shares from related parties.  The inability to transfer shares in-specie to a SMSF will become a more costly exercise as well.  This area is far more prevalent than collectables, yet little has been raised around these proposed changes?

So why are we where we are on this issue of collectables? I refer you back to the “Ten Guiding Principles for SMSFs” developed by the Cooper Review Panel, designed to underpin the regulation of SMSF specifically and more broadly for future policy-making in the SMSF sector.

The recognition of special risks in a SMSF environment (principle 7) and requiring some levels of intervention means that trustees (and their advisers) will need to change how they operate in a new SMSF landscape.  These changes are there to uphold strength in retirement policy but where it provides freedom of choice and greater control in making decisions over someone’s own retirement.

The industry has a right to have input in the future direction of superannuation policy within Australia, but I think arguing the toss on collectables is really making a mountain out of a mole hill… be happy that they are here to stay (just with tighter regulation)!!

Confusion to reign supreme as consultation paper released into extension of contribution caps for individuals aged 50 and over

Is there a need to further complicate the contribution cap laws?

The Minister for Financial Services & Superannuation, the Hon. Mr Bill Shorten has announced today the release of a Treasury consultation paper on concessional contributions caps for individuals aged 50 and over.  This paper is a result of the Fairer Super announcements in mid-2010 to extend the $50,000 transitional concessional contribution limit for those aged 50 or over with account balances of less than $500,000.

The purpose of this consultation paper is to outline the Government and Treasury’s preliminary views on this matter and to seek submissions on the design options for the workings of the concessional contribution cap for people aged 50 and over.

I have outlined below some key elements of the consultation paper:

  • The proposed changes if/when received Royal Assent would commence from 1 July 2012.
  • The $500,000 threshold will not index each year.
  • The cap will be based upon a rate of $25,000 over and above the indexed concessional contributions cap, currently at $25,000 (totaling $50,000).  Therefore, this contribution cap will index each year with AWOTE , however only in increments of $5,000.
  • The date to calculate a member’s total superannuation balance would be either:
    • 30 June in the year preceding the year in which contributions are made (this is unlikely due to timing of reporting to the ATO each year, that is, half the year or more will have gone before an assessment can be made on eligibility); or
    • 30 June two years prior to the end of financial year in which the contribution was made (i.e. FY 2013 would use FY2011 member balances)
  • All super entitlements will be counted, including memberships of accumulation funds, defined benefit schemes, untaxed and constitutionally protected funds and schemes.

Various options have been drafted regarding eligibility for those who have commenced drawing down benefits as either a pension or lump sum.  These options include:

  1. Extending eligibility to those who have commenced withdrawals and add those withdrawals to the account balance
  2. Extend eligibility to those who have commenced withdrawals but do not add withdrawals to the account balance; and
  3. Exclude those who have commenced withdrawals from eligibility

To best demonstrate the application of these options, let’s look at an example:

Option 1

Jack is 58 years of age and has a super balance of $510,000 as at 30 June 2012. He intends to start a transition to retirement income stream and withdraws the maximum 10% pension amount of $51,000 for the 2012/13 financial year.  Jack contributes $25,000 into super, with a further $10,000 of net earnings applied to 30 June 2012.  Jack’s closing member balance is $494,000 (i.e. $510k – $51K + $25k + $10k = $494k).  Even though Jack’s balance is under $500,000 at balance date 30/06/2013), for the purposes of qualifying for the higher concessional contribution cap, he would need to add-back the pension withdrawal.  This means he has a balance of $550,000, therefore being ineligible for the higher cap.  The same methodology applies whether the benefit paid is a lump sum or pension.

NB.  If this option is adopted, only benefits paid under hardship grounds would be excluded.

Option 2

Using the same example above, Jack would not be required to add back the $51,000 pension payment.  As a result he would be eligible for the higher cap.   Whilst this option reduces complexity, the government is concerned about the potential abuse of withdrawals to manipulate the eligibility for the contribution cap.

Option 3

Again using the same example, as Jack has decided to commence taking benefits from the fund as an income stream, he would simply become ineligible for the higher cap.  Whilst again trying to simplify the legislation, this would prejudice anybody with balances of less than $500k that have commenced pensions/taking benefits, including transition to retirement.

Is there scope for contribution splitting or reserving?

The consultation paper has outlined that any spouse contribution splitting would not be considered a draw down for the purposes of determining superannuation balances.  However, it is important to note that typically a spouse contribution split cannot take effect until after the end of the financial year (i.e. 1 July onwards), so appropriate planning needs to be considered here to take any advantage of this requirement.

The thought of this legislation potentially opens up the use of reserving strategies within SMSFs.  However, it has been noted that calculations of superannuation balances will include their share of unallocated fund reserves. Further details will be required to further understand the implications of this statement.

Specific issues for SMSFs

In addition to the unallocated reserves issue above, the paper discusses the need to value all fund assets to market value each year.  Funds that do not, simply would be ineligible to use the higher cap.  This view is consistent with the Cooper Review recommendations (supported by government) to have SMSFs value to market every year.

The introduction of this reform whilst trying to encourage individuals with low superannuation account balances is commendable, the cost/benefit analysis for some 275,000 people who will benefit just doesn’t add up.  In addition, I believe that it “flies in the face” of the Super System Review recommendations to try to deliver lower cost super solutions to individuals.  Not only will it require significant infrastructure upgrades (in particular the Australian Taxation Office), but the ongoing management of information with members to make sure breaches don’t occur.  We may see further spikes in excess contributions tax assessments!!

Surely to encourage people to save for their retirement, we don’t need to start introducing layers of complexity and using multiple years of information to determine simple eligibility for contributing for one’s retirement.

An extension to the $50,000 concessional contribution cap permanently for people aged 50 and over is the simplest and most common sense solution.  But I wonder if anybody is listening?

Click here access the consultation paper from the Treasury website.

Click here to read the Minister’s press release.

(C) The SMSF Academy 2012
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