Industry funds turn the heat up on SMSFs
In line with predictions from the SMSF Association, Industry Super Australia has produced a seething analysis of the SMSF sector, taking aim at low balance funds and the substantial growth in use of gearing strategies.
Industry Super Australia analysed 2015/16 SMSF statistical data from the tax office, concluding that SMSFs with balances under $2 million fall “seriously short” of APRA funds when it comes to returns.
A paper from the advocacy group plucked statistics that paint a sour picture for SMSFs, including that for SMSFs with balances below $200,000, returns dropped into the negatives.
Further, the paper noted a significant spike in total assets under limited recourse borrowing arrangements (LRBAs) to $25.4 billion or 17.8 per cent, which is an 18-fold increase since June 2011
“Unless it contains multi-million dollar assets, an SMSF may prove a mistake for the average consumer,” Industry Super Australia said in a statement.
Industry Super Australia hasn’t fudged the figures, but there’s holes in the context of the statistics.
The SMSF Association’s (SMSFA’s) head of policy, Jordan George, said annual ATO statistics aren’t necessarily a “perfect” indication of a fund’s performance, particularly in its early stages.
“For example, they pick up establishment costs in the first year of operation, and don’t count for events like a rollover that is set to come in for the next financial year,” Mr George told SMSF Adviser.
Importantly, the statistics don’t paint a picture of where an SMSF sits in the context of a broader retirement income strategy, and what the members’ long-term plans are for it as a savings vehicle. With similar thoughts in mind, actuary and head of customer at Heffron SMSF Solutions, Meg Heffron, has previously explained to SMSF Adviser why she chose to start her SMSF with $30,000.
Further, Mr George said there is “good evidence” that SMSFs can achieve scale, and strong returns, over time.
In January this year, the ATO examined SMSFs that lodged their first return in 2012, and traced their performance up to 2016.
The tax office found 51 per cent of a sample of 36,160 SMSFs reported total assets of $1 to $200,000 in 2012. Comparatively, this asset range made up only 20 per cent of funds still active in 2016.
In relation to gearing in SMSFs, Mr George pointed out the growth is coming from a starting point of zero in 2007, which is when borrowing became allowed in SMSFs.
“It’s something that we should keep on analysing and assessing, but it’s coming from a low base, and as a proportion of total assets held it is still relatively small,” Mr George said.
This analysis from Industry Super Australia follows predictions from outgoing SMSFA chair, Andrew Gale, that stakeholders in the APRA-regulated space would stir up controversy about SMSFs to deflect attention from the royal commission investigations.
“With large superannuation funds included in the terms of reference and under scrutiny, we expect the large fund sector, especially industry funds, to seek to deflect attention by pointing out issues with SMSFs,” he said in mid-February.
“Issues raised could include minimum reasonable account balance sizes for SMSFs and limited recourse borrowing arrangements,” he said.