Balance change a breakthrough for SMSFs

SMSF starting balance

The removal of references to a specific starting balance for an SMSF in ASIC guidance is a key shift for the sector, the SMSF Association has claimed.

The removal of references to a $500,000 balance as an appropriate starting point for an SMSF in guidance issued by the Australian Securities and Investments Commission (ASIC) is a recognition of research into the issue, according to the SMSF Association (SMSFA).

The association welcomed ASIC’s removal of the figure of $500,000 as an indicator of the “appropriateness of advice” to establish an SMSF, pointing to research conducted by the University of Adelaide that found no strong basis for the use of that figure.

SMSFA deputy chief executive and director of policy and education Peter Burgess said the change in advice, contained in ASIC document INFO 274, which replaced INFO 205 and 206, was a “significant breakthrough” for the SMSF sector.

“Earlier this year, and in light of fresh evidence in a University of Adelaide research report on the performance of SMSFs, the association wrote to ASIC requesting that it review its guidance for Australian financial services licensees (and their representatives) who provide advice to retail clients about SMSFs,” Burgess said.

“In particular, references in INFO 206 to SMSFs with balances below $500,000 as having lower investment returns and will often be uncompetitive compared with APRA (Australian Prudential Regulation Authority)-regulated funds was at odds with the findings of the University of Adelaide research conducted on a sizeable proportion of the SMSF sector.”

He highlighted the University of Adelaide research did not find any material differences in performance patterns for SMSFs between $200,000 and $500,000, or that smaller funds in that range delivered lower investments, on average, than larger funds in that range, and suggested the appropriate establishment threshold was $200,000.

“It’s extremely pleasing that the regulator has taken heed of this research and our representations on this issue and has removed references to the $500,000 threshold,” he said.

He added that while no figure was contained in the latest ASIC guidance, the University of Adelaide research found SMSFs with balances below $200,000 were more likely to have lower net investment returns compared with funds with balances of $200,000 or more.

“Unless a large contribution will be made into the SMSF within a short timeframe, such as within a few months, after the fund is set up, it’s unlikely starting an SMSF with a balance of less than $200,000 is consistent with your client’s best interests,” he said.

He also noted the new guidance made specific references to the risks involved with SMSFs and the importance of seeking professional advice.

“The association is very pleased to see such a prominent reference to the need for financial advisers to have specialist knowledge about SMSFs before providing advice and the important need for advisers to maintain this knowledge and expertise over time,” he said.

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