The Australian Securities and Investments Commission (ASIC) recently issued an information sheet on the costs associated with running an SMSF.
Perhaps the most noticeable item in Information Sheet 206 “Advice on self-managed superannuation funds: Disclosure of costs” (INFO 206) was the recommendation that establishment of an SMSF should only be a serious and viable suggestion to individuals with more than $200,000 of retirement savings.
The debate over what is an appropriate asset balance before you can viably set up an SMSF has been going on since Adam was a child. Originally the balance touted was $400,000, based on an extrapolated expense figure that set out to ensure associated costs would remain at around 2 per cent of total fund assets.
This figure has progressively dropped, as technology has played its role in reducing fund administration costs, until now it seems to have officially landed at a sum of $200,000.
While this figure is only a suggested balance, and the regulator has issued a qualification to say there will be some cases where an SMSF may be suitable for an individual with retirement savings of less than $200,000, the concept of a minimum balance seems way off the mark for this sector.
ATO statistics show the average SMSF member balance is just over $500,000. This number has been steadily increasing and has been achieved without a minimum establishment amount being in place.
With the sector experiencing continuing growth, without a significant volume of fund wind-ups, it appears the right people are running their own super funds. So there seems no need to impose a minimum establishment balance on prospective SMSF owners, even if it is being done with a softly-softly approach.
Unfortunately, what INFO 206 may indicate is the inherent lack of understanding as to how the SMSF sector works.
Despite numerous studies indicating most people set up an SMSF because they want more control over their super, ASIC still seems to miss this point.
The fact of the matter is if this is the main reason for people to gravitate to the sector, the mere suggestion of a minimum establishment balance is totally irrelevant.
Apart from ignoring the primary motivation for owning an SMSF, the recommendation also ignores a series of strategic elements available solely to SMSFs that again can render a required minimum balance immaterial.
One such strategic consideration is the use of limited recourse borrowing arrangements to significantly boost an SMSF’s asset level over a relatively short period of time with a property or a significant bundle of shares.
This apparent lack of understanding from ASIC raises concerns for the sector as a whole.
Sensible and prudent regulation cannot be implemented without a regulator knowing inside and out the industry segment it is overseeing.
As ASIC’s involvement in the SMSF space is still in its relative infancy, it is unreasonable to expect its knowledge of the sector to be comprehensive at this point in time.
But we all hope ASIC will seek to increase its understanding of SMSFs to avoid the imposition of any impractical and unnecessary regulations.
