SMSF performance ‘grossly misrepresented’ in PC report

Class said figure 2.109(b) which was presented in the Commission’s report is of particular concern, as there is a fundamental misunderstanding about what it illustrates in terms of SMSF performance, with the figures on performance “grossly understated”.

This misrepresentation is due to the inherit differences between how APRA and the ATO report fund performance, Class said.

While the ATO includes contributions tax and insurance costs in net earnings, APRA does not, Class explained in the submission.

Given these extra costs, the ATO performance measure will always be worse than APRA’s, and the smaller the SMSF balance, the higher the impact of those extra costs, it said.

Class completed its own analysis for the submission based on publicly available contribution tax and insurance data from the ATO, to restate SMSF performance so it could be directly compared to APRA fund returns.

“For the ten year period the Commission’s report covers, SMSFs outperformed APRA funds on a like-for-like basis,” said the submission.

In a technical supplement to the report, the Commission noted that if APRA fund performance is calculated using the ATO method, then SMSFs outperform APRA funds, with SMSFs generating a return on assets of 5.59 per cent compared to APRA fund return of 4.98 per cent.

When SMSF performance is restated using the APRA approach, Class stated that the amount by which SMSFs outperform APRA funds is even higher, with SMSFs achieving a rate of return of 6.71 per cent compared to APRA funds at 5.58 per cent.

The analysis by Class also indicated that when the switch to the APRA method is made, there is more than a four per cent improvement in the average return for SMSFs in the $1 to $50,000 bracket.

Class also pointed out in its analysis that there are issues with the way in which funds are grouped into brackets in calculating performance.

In its report, Class noted that the Commission grouped funds from each year based on their size.

Funds that perform badly will decrease balances and migrate down to smaller brackets and funds that are making good returns will increase and migrate up into higher brackets, the submission said.

“The criterion for selecting funds to belong to a group is based on closing balances such as the $1-$50,000 bracket for example, selects all funds that ended the year on $50k or less,” it explained.

“This effectively selects for underperformance compared to grouping based on opening balances. For example, a $46k SMSF with a 10 per cent return will move up to the next bracket but a $55k fund with a -10 per cent return will migrate down into the lower bracket. If the funds reversed their fortunes in the following year then they would swap brackets, with only the poor performance years being included in the lowest bracket.”

By regrouping funds based on opening balance, this makes more than a 10 per cent percentage point improvement in the return for the $1-50,000 bracket, it said.

The SMSF Association also raised further concerns about a potential $1 million minimum for the establishment of SMSFs in its submission to the Productivity Commission.

“If the Commission were to recommend that SMSFs should not be [set up] until a $1 million balance was available[,] then this could result in a significant CGT cost imposed on the fund members when choosing to switch to an SMSF,” said the submission.

“This can result in an unnecessary erosion of retirement savings that can be reduced by switching to an SMSF earlier in life. In fact, establishing an SMSF earlier can result in lower superannuation costs over the lifecycle for its members due to tax efficiency.”