ATO stats reveal a healthy sector

If you thought reading ATO statistics would be a sure-fire cure for insomnia, you would be wrong. Or, more accurately, you would be wrong if you were an SMSF trustee casting your eye over the ATO’s SMSF statistical overview for 2016/17. Because despite what all the naysayers say about SMSFs, and there’s no shortage of them, this overview paints a very glowing picture of this superannuation sector.

What it reveals is a sector that outperformed its Australian Prudential Regulation Authority (APRA)-regulated cousins in terms of fund performance, and saw expenses fall and the quality of advice improve. Just as significantly, the median and average balance of SMSF establishments, a particular bête noire of SMSF critics who constantly argue for a minimum entry point, rose sharply.

The numbers are revealing. The average assets when an SMSF was established in 2016/17 rose to $521,000 compared with the relatively stable levels of $370,000 in previous years, representing a stellar 38 per cent increase. When based on median assets, the figure also rose substantially, from the low $200,000 levels of the previous four years to $320,000 in 2016/17.

So what do these higher establishment numbers tell us? From the association’s perspective, there are three key factors at play, of which the most important, as well as reassuring for trustees, is that the quality of advice is improving. Markedly.

SMSF trustees and their advisers are now understanding they need an appropriately sized SMSF to ensure they receive the full benefits of such a fund. This understanding has coincided with the introduction of the limited licence regime on 1 July 2016, which meant any individual providing SMSF establishment advice must have an Australian financial services licence or be an authorised representative of a licensee.

It’s been the association’s mantra ever since its inception back in 2003 that the key to ensuring SMSFs are established appropriately is having quality professional financial advice that includes size and scale in any decision to establish an SMSF. The provision of quality financial advice can ensure individuals only set up SMSFs when it’s in their best interests.

Evidence such as this simply strengthens our push to have all advisers armed with specific SMSF education and qualifications before they can offer advice. The benefits will not only be reflected in more appropriate establishment balances, but materially improve member outcomes.

The second factor at play is the growing number of SMSF establishments by individuals aged between 35 and 44. These new SMSF trustees’ entire working lives have been under the umbrella of the superannuation guarantee introduced in 1992 and, as such, they are likely to have larger balances when they set up an SMSF, especially as a couple.

From the association’s perspective, there are three key factors at play, of which the most important, as well as reassuring for trustees, is that the quality of advice is improving.

John Maroney

Thirdly, the increase in establishment assets could also have been driven by behavioural changes resulting in individuals establishing SMSFs with larger amounts due to the expected lower contribution caps taking effect on 1 July 2017.

What’s particularly interesting is these establishment numbers, both average and median, sit well with the Productivity Commission’s proposed target minimum balance of $500,000. The average balance is above that number and the median balance, based on the current trend, is on target to exceed it in the next few years.

Investment returns for 2016/17 will put a smile on all SMSF members’ faces. In that financial year they made an average return of 10.2 per cent compared with the 9.1 per cent return for APRA-regulated funds. That’s right, the little guys outperformed larger superannuation funds, with this result not only marking a strong continual run of positive returns by SMSFs, but ongoing comparable performances to the APRA-regulated sector.

We believe this is quite a significant result for SMSFs, as differences in ATO and APRA investment return methodologies have typically seen SMSF investment returns understated compared to those of APRA funds. This is predominantly due to the differing data sets available to the ATO and APRA, which limit the comparability of the investment returns reported by each. Aligning the methodologies may require the ATO to impose additional reporting burdens on SMSF trustees.

What’s been a further drag on SMSF funds, often conveniently overlooked, is the fact SMSFs have a significant proportion of members in retirement phase compared with APRA-regulated funds, which can distort comparisons. The former have a greater focus on capital preservation and income, which can come at the expense of investment returns.

The reality is comparing investment returns between SMSFs and APRA-regulated funds has often been an apple-and-orange comparison. But these ATO figures do provide evidence SMSFs can and do match the investment performances of the professionals. At a time when some critics are still calling for another review into the SMSF sector, the ATO statistics offer hard evidence that SMSFs are not the poor cousins they are so often portrayed as.

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