Speaking at an event in Sydney, Townsends Business and Corporate Lawyers owner Peter Townsend said there has been insufficient consideration of return in the regulatory materials provided on minimum balances for SMSFs.
While ASIC did admit in Consultation paper 216 (CP 216) that cost was only one of the factors that should be considered when establishing an SMSF for a client, with responsibilities, time and risk also listed as important factors, there was no mention of return, said Mr Townsend.
“If there’s a particularly good investment and the SMSF can return 15 per cent compared to the APRA fund’s five per cent, even with $75,000 then the SMSF is the clear way to go,” said Mr Townsend.
“If you can make a case that the investment that you’re going to put into the SMSF is going to return substantially more than the APRA fund, then that covers off on the best interests rule.”
There may be other reasons for establishing an SMSF below the recommended $200,000 also, he said, with some of the research reports examining the viability of low balance SMSFs pointing to the issue of capital gains tax.
“There can be capital gains tax when you switch from an APRA regulated super fund to an SMSF,” he said.
“They’ve pointed out the fact that the longer you wait, the more CGT that might apply. So do you wait until you hit the $100,000 mark or the $200,000 mark or the $300,000 mark?”
The practitioner, he said, can also argue that the client wants a non-standard investment such as real estate and/or that they want to use gearing.
“The adviser could also make it clear that the fund is expected to reach the benchmark within a reasonable time,” he said.
I agree with all that Peter. ASIC wont allow IFA’s to talk about returns because they’re the unknown quantity. They will however allow Union Super Funds to talk up their performance big time, as long as they throw in a little disclaimer at the end to say “Past returns are no guarantee of future returns”. So while that’s the only selling point for Union Super funds, it’s something that you cant rely on…. Gotta love ASIC….
ASIC only comes down hard on costs because that’s something that generally wont change, especially for SMSF’s. But when you can get great SMSF admin services for $799 pa that includes tax and audit for an SMSF that is invested in cash, shares and managed funds, then from the old 1% rule that ASIC likes to quote, you could have a fund as low as $79,900 and still only be paying 1% of the fund in admin fees. A fund starting with $100K would see a fee of only 0.8% in the first year and going down quickly from there. . But could you imagine the apoplexy that ASIC would have if advisers started establishing SMSF’s with these size balances.
Gotta love technology
Definitely agree with the points made in this article about the ROI.