The statistics, released yesterday, showed ROA on average was negative for SMSFs with balances less than $200,000 for four out of the five years leading to June 2013 and negative for SMSFs with less than $100,000 for all five years.
SMSFs with balances greater than $200,000 on the other hand only experienced negative ROA on average in 2009 and 2012.
The ATO said in its overview the statistics on return on assets show a “direct relationship with SMSF size”.
“Generally the larger the SMSF asset holding the more improved the return on assets,” said the ATO.
The statistics for 2013 demonstrated this with SMSFs greater than $2 million achieving an 11.98 per cent average ROA; while those with less than $50,000 generated a -16.78 per cent average ROA.
SMSF Professionals’ Association of Australia senior manager of technical and policy Jordan George said the stronger return on assets among the larger funds could be the result of other factors such as the mix of assets in the SMSF rather than size.
“Those funds with higher balances are probably more diversified,” said Mr George.
“The ATO stats do tend to indicate that larger funds have diversification which in turn helps them obtain greater returns.”
Mr George said the statistics did show the average balance for SMSFs being established had increased eight per cent in the five years to 30 July 2014 up to $187,000.
The statistics, he said, also indicated the median balance has increased 20 per cent over the five years.
“The statistics should allay some people’s concerns that too many SMSFs are being set up with very small balances – the ATO shows this isn’t an issue,” he said.
The ATO statistics also showed operating expenses account for a much greater proportion of the smaller funds in comparison to larger funds.
“[The statistics] show the estimated operating expense ratio declines in direct proportion to the size of the fund,” said the ATO.
“In 2013, SMSFs with $50,000 or less in assets had an average operating expense ratio of 10.9 per cent compared to SMSFs with more than $500,000 in assets that had an average of less than 1.5 per cent.”
Most SMSF do not have investment reserves for smoothing income. It would be interesting to see how public offer funds, retail & industry, went if they did not have investment reserves for smoothing out income fluctuations.
Also small SMSF generally invest initially in cash and then move into shares. With market value measured at 30 June a negative movement in share values, even if only one share, will likely result in a negative ROA. But as we all know the market goes up and down, so if a sale hasn’t happened, then there is no real loss, just a paper result and a negative ROA. It happens and will continue to happen but it doesn’t mean that the small balance fund has a problem. A lot of SMSF are set up towards the end of the financial year, any rollovers occurring from retail or industry funds take quite some time to happen & occur in cash. So returns at this time will be lower. But if the strategy is correct it is not a reason not to set up a SMSF with a small balance.
“The statistics, released yesterday, showed ROA on average was negative for SMSFs with balances less than $200,000 for four out of the five years leading to June 2013 and negative for SMSFs with less than $100,000 for all five years.”
Ponder that when arguing a SMSF is appropriate for balances under $200,000.