Date posted: 25/07/2018 5 min read

More oversight and minimum asset levels for SMSFs  - good ideas?

Recent media commentary suggests this should now be looked at.

In brief

  • Many SMSFs start small then quickly become larger
  • It is questionable to compare APRA regulated funds with SMSF returns
  • SMSFs are not the right vehicle for everyone

The influential journalist Adele Ferguson article in the AFR on 23 July suggested that it was time to consider if those wanting to establish a SMSFs should have a minimum level of assets in superannuation and that, in general, the small super fund sector needs more regulatory oversight.

These are interesting thoughts and deserve some analysis.

Minimum Asset Levels for SMSFs

Ferguson’s main thesis is that Productivity Commission’s said recently that SMSFs with less than $1m in total assets have total returns lower than average APRA funds primarily because of higher fees.

She also refers to an April ’18 Industry Super Australian publication that reviewed the ATO’s SMSF data and concluded that SMSFs are underperforming investment wise compared to other fund types.

In Chartered Accountants ANZ’s submission to the Productivity Commission’s report into the superannuation sector we pointed out that there are many reasons why someone would want to set up a SMSF with a small amount of assets such as:

  1. A SMSF may have a temporarily low balance because substantial contributions or benefit transfers will be made in the near future.  In its 2015/16 SMSF annual report the ATO pointed out that 51% of funds created in 2012 had assets less than $200,000 in that year but by 2016 this had fallen to 20%
  2. The members in the fund wish to use their SMSF to hold a specific investment that is not available in other vehicles – for example, artwork, collectibles or real estate
  3. Active market traders who wish to use some of their retirement savings to trade a small portion of their retirement savings and have decided it is easier to have this money in a separate entity

Our submission also said:

"The continuing publicity about poor behaviour within large financial organisations, including industry funds, directly and indirectly also encourages consumers to take control of their own retirement affairs.

The ATO has said on numerous occasions that most SMSFs are well run and trustees seek to comply with the laws and most attempt to invest sensibly.  The views of our members, who collectively perform a wide range of functions for most SMSFs, concur with this conclusion.

Most industry, corporate, public sector and retail super funds have a small cohort of members with large balances and many members with small to moderate balances.  In many cases the small cohort of large balance members pay the majority of the fees used to run the fund.

Some APRA regulated super funds may not be financially viable without a sufficient number of higher account balance members.

As the Commission is aware from its own research it is those with these larger account balances who might be more willing to consider a SMSF because of the estate planning and potential tax planning benefits which it is often claimed large funds do little to consider when deciding to buy/sell/hold a particular investment that may be available because of their larger pool of assets.

As a result of this potential loss of larger balance members many industry and retail super funds have taken active strategies to address this competition from SMSFs.  It is our firm view that SMSFs have provided important competitive pressure on APRA regulated super funds that in most cases otherwise would not have existed.

At this time we are not convinced that there needs to be a minimum level of assets for newly created SMSFs."

Problems comparing SMSF returns and APRA fund returns

One problem with comparing APRA fund returns with SMSF annual return data is that each dataset is gathered in a very different manner.

The ATO primarily collects data to ensure SMSFs are complying with the Superannuation Industry (Supervision) Act 1993 and is not a prudential regulator.  On the other hand APRA collects data to satisfy its statutory prudential regulator obligations.

Clearly these are different functions which means that the ATO and APRA will want to collect different data to satisfy their separate legislative functions.

In addition APRA super funds are reporting entities and must comply with AASB 1056.  Conversely SMSFs are not reporting entities and need to satisfy, at a minimum, basic accounting standards.

We note that in draft recommendation 22 the Productivity Commission says that a range of government agencies need to create a data working group to improve overall system data to help improve consistency.  We believe this would be a welcome outcome as long as the collection of data did not degenerate into a large and expensive function for funds to comply with.

Total return data is only one part of the picture and for some not their focus

Then there is the problem of comparing total returns when many SMSF investors (and some APRA fund members) are more nuanced in how they invest.  They might not be very interested in short term investment cycles – and the volatility of capital prices seen in shorter periods – but are focused on the longer term income that they can obtain from their investments.

Public Practising Accountants unable to recommend that a SMSF be closed

One of the reasons small super funds are not closed down is that Chartered Accountants who do not have a financial services license cannot recommend this step to their clients.  And with only a small amount of money some clients maybe reluctant to receive financial advice.

SMSFs aren’t for everyone

Ferguson says that SMSFs can be catastrophic for less sophisticated investors who have limited money.

This statement is obviously true if they attempt to run a fund with minimal assistance or with the help of those who don’t have their best interests at heart.

AFR article

Adele Ferguson’s article in the AFR on 23 July.

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