SMSF confidential: the inside story on DIY super funds

Note: The ATO publishes an annual report about SMSFs for each financial year. This article covers the ATO’s 2010-2011 statistical review of SMSFs (released in late December 2012). This report does contain data for the 2011-2012 year as well. The annual report for the 2011-2012 year will be available in early 2014.

The Australian Taxation Office has delivered on its promise to regularly share its market intelligence about self-managed super funds (SMSFs). The ATO has now provided the answers to some of superannuation’s burning questions, such as, ‘Are SMSFs really cheaper than larger super funds?’ and ‘Do SMSFs perform better?’

In late December 2012, the ATO released its third report into self-managed super funds, publishing key data about SMSF costs, investment performance, SMSF asset allocation, SMSF demographics, types of trustees, and what SMSFs are doing in pension phase.

The latest report gives us an insight, albeit a slightly static and historical insight, into the wealth and behaviour of SMSF trustees. For some SMSF trustees, the ATO findings will simply confirm what you already know about SMSFs based on your own SMSF experience. For many SMSF trustees and service providers however, the ATO report highlights trends in how SMSF trustees invest, how much SMSFs cost to run, and how much money is flowing into SMSFs.

Background: This trend towards ATO transparency began in 2009, when the ATO produced a SMSF statistical summary for the Cooper Review. The 2009 report contained information from both publicly available and previously unpublished ATO data. Two years later, the ATO updated this earlier statistical summary by producing the report, ‘Self-managed super funds: A statistical overview 2008-2009’. And again, in April 2012, the ATO has released a SMSF report, ‘Self-managed superannuation funds: A statistical overview 2009-10’. The third, and latest, report was released in late December 2012 covering the 2010/2011 year.

This article is a snapshot of the ATO’s latest statistical summary. Continue reading for the inside story on SMSFs including:

• ATO analysis of the SMSF data
• SMSF growth
• Individual versus corporate trustees
• SMSF service providers
• Age and income of SMSF trustees
• SMSF investment performance and asset allocation
• SMSF costs

What does the ATO think of the report?

The ATO provides some preliminary observations in the executive summary of the report, which is set out below:

The SMSF sector remained the largest sector of the Australian super industry, with 99% of the number of funds and 31% of the $1.4 trillion total super assets as at 30 June 2012.¹

At 30 June 2012, there were around 478,000 SMSFs holding $439 billion in assets. There were also approximately 913,550 members in the SMSF sector, almost 8% of roughly 11.6 million members in Australian super funds.

The data confirms the SMSF sector responds to changing economic circumstances. This was evident by changes in the level of growth in SMSFs, contributions made to the sector and shifts in asset types held. There were positive shifts in SMSF numbers and the level of contributions in line with improved confidence in economic conditions. SMSFs are both flexible and resilient in their ability to concentrate or diversify asset portfolios.

SMSF members tended to be older than members of APRA-regulated funds and had both higher average balances and higher average taxable incomes. The trend continued for members of new SMSFs to be from younger age groups than those of the total SMSF member population.

The majority of SMSFs are solely in the accumulation phase (64%) however there is a clear shift for more recently established SMSFs to start pension payments earlier.

SMSFs directly invested 78% of their assets, mainly in cash and term deposits and Australian-listed shares (a total of over 60%). While smaller SMSFs tended to favour cash and term deposits, larger SMSFs had a greater tendency to invest in listed shares.

In 2010-11 the estimates of the return on assets for the SMSF sector followed on from 2009-10 again showing positive returns. This compares to the negative returns in 2007-08 and 2008-09. The estimated return is consistent with the total super industry, although the size of the positive returns for SMSFs was not quite as large as for non-SMSFs.

Estimates of the operating expense ratio of SMSFs continued to decline in 2010-11. Further the ratio declined in proportion to the increase in the fund’s asset size. In contrast the estimated SMSF average operating expenses in dollar terms increased in 2010-11, particularly for SMSFs solely in the accumulation phase.

SMSFs are still the leader of the pack

SMSFs are the fastest growing sector of the Australian super industry for the 4 years to 30 June 2012. During this 4-year period, SMSF assets grew by 33%, while total super assets (including large funds) grew by 23%.

The number of SMSFs also grew substantially (27%) during the 4 years to 30 June 2012, rising from 376,000 SMSFs at June 2008, to 478,000 SMSFs at June 2012.

Note: Nearly half (44.8%) of all SMSFs have existed for more than 10 years, and 90% of all SMSFS established in the past 10 years to June 2011 are still in existence.

For information on the growth in number of SMSFs see the full ATO report (see link at end of article), or check out SuperGuide articles SMSFs lead the super pack, again and Comparing super funds: Who’s who in the super zoo. 

Who runs the SMSF show, really?

Individual trustee, or corporate trustee? According to the ATO report, three-quarters (75%) of SMSFs had individual trustees rather than a corporate trustee, as at 30 June 2012. In recent years there has been a shift away from corporate trustees: for the year ended 30 June 2012, 91% of newly registered SMSFs had individual trustees.

Accumulation phase, or pension phase? Nearly two-thirds (64%) of SMSFs reported they were solely in accumulation phase, while the remaining 36% reported they were making pension payments to some or all members (and so were considered in pension phase), for the year ended 30 June 2011. The number of SMSFs considered in pension phase has increased 10% in the past 4 years. An interesting trend the ATO has observed is that there has been a continuing shift towards new SMSFs starting pensions in the first year inferring that an increasing number of Australians are setting up SMSFs with superannuation savings transferred on retirement.

SMSF approved auditors. The audit data for the year ended 30 June 2011 was not available in this report. More than 10,000 approved auditors were involved in the SMSF sector as at 30 June 2010, conducting 35 audits each on average. Of these 10,000 approved auditors, more than a third (37%) conducted fewer than 5 audits, and 16% of auditors (1600 of them) had a single SMSF client. What the ATO could say about the 2011 financial year and SMSF auditors, is that more than 10% of auditors were also providing other services for SMSF clients such as tax agent, accountant or administrator.

Tax agents and accountants. Around 12,500 tax agents and accountants looked after SMSFs as at 30 June 2011, with 98% of 2011 SMSF annual returns lodged by a tax agent. Tax agents and accountants had an average of 28 registered SMSF clients, although it is worth noting that just over half (53%) of tax agents looked after 10 or fewer SMSFs, which means the higher average is skewed by the 6% of tax agents (708) that look after 100 or more SMSFs.

How old, and how wealthy, are SMSF trustees?

According to the ATO report, just under a quarter(22%)of SMSF members are aged 65 and over, while in the non-SMSF sector only 4% of account holders are over 65. Three quarters of SMSF members are under 65 as at 30 June 2012, and 84% of SMSF trustees are older than 45.

The gender balance of SMSF trustees is 53% male and 47% female, and nearly 70% of SMSFs have two members, and 22% of SMSFs have one member.

In 2011, SMSF members of all ages had a higher average taxable income than non-SMSF members. The average taxable income of all SMSF members in the year ended 30 June 2011 was almost $98,000, compared to non-SMSF members who had an average taxable income of $54,000. SMSF members aged 35 to 49 had an average taxable income of around $124,000 compared to non-SMSF members in the same age group who had an average taxable income of around $65,000.

Note: At 30 June 2011, the average SMSF member balance was $506,499 which the ATO reports to be approximately 17 times the size of the average account balance of non-SMSFs (just over $29,000). Also, the average starting balance for a new SMSF (reported by funds established during the 2011 financial year) is just over $181,000.

For more information on the age and wealth profile of SMSF members see the full ATO report (see link at end of article, or check out SuperGuide article Do you fit the profile of a ‘typical’ SMSF trustee? 

What do DIY super fund trustees invest in?

As at 30 June 2011, roughly 61% of all SMSF assets are invested in 2 asset classes – Australian listed shares (32%) and cash and term deposits (29%). According to the ATO, in 2011 there was a shift back to cash and term deposits, and towards listed shares. This is the first time in 3 years that cash and shares have shifted in the same direction. There was also a continued shift away from listed trusts.

For more information on the types of SMSF investments and the typical asset allocation see the full ATO report (see report link at end of article), or check out SuperGuide article SMSF investment: Where does all the DIY super money go? 

How well do SMSFs perform?

SMSFs outperformed large super funds for the three years ended 30 June 2007, 30 June 2008 and 30 June 2009, but were pipped at the post for the years ended 30 June 2010 and 30 June 2011.

Note: While the methodology used to estimate SMSF performance resembles APRA’s, the data collected is not the same. The data in the table above is sourced from three ATO reports: SMSFs – A statistical overview 2010-2011, SMSFs-A statistical overview 2009-10, and SMSFs – A statistical overview 2008-09.

How much do SMSFs cost?

About two-thirds (65.6% for 2011) of SMSFs had an estimated operating expense ratio of less than 1%), with more than a third of SMSFs (40%) having an expense ratio of less than 0.25%, that is a quarter of 1%!

The average operating expense ratio has fallen steadily in percentage terms over the 4 financial years ended 2008 (0.69% or $6,500), 2009 (0.59% or $5,100), 2010 (0.5.6% or $4,900) and 2011 (0.54% or $5,100). Note that in dollar terms, the average operating expenses have increased during the 2011 year.

Note: SMSFs with fund balances of less than $50,000 had an 8% average operating expense ratio compared to SMSFs with fund balances of more than $500,000 with an average expense ratio of less than 1%.

The average SMSF audit fee was $577 for the year ended 30 June 2011, compared with $607 for the 2010 year. For the 2011 financial year, 55% of SMSFs paid less than $500 to approved auditors for audit fees, while almost 3% paid more than $2,000.

For more information on SMSF costs see the full ATO report (see report link at end of article), or check out SuperGuide articles SMSF: How much does a DIY super fund cost? and Super fees: how much should a fund charge you? and Are SMSF audits too expensive?

You can access the ATO reports by clicking on the links below:

• Self-managed super funds: A statistical overview 2010-11
• Self-managed super funds: A statistical overview 2009-10
• Self-managed super funds: A statistical overview 2008-09