SMSF confidential: the inside story on DIY super funds

SMSFs outperform large funds even in difficult investment climates, according to the latest ATO report on SMSFs. If that news isn’t confronting enough for the non-SMSF super industry, add the fact that SMSF members are also richer (and older) and have larger account balances than members of large super funds such as retail and industry funds. Continue reading for the inside story on SMSFs.

The Australian Taxation Office will now regularly share its market intelligence about self-managed super funds (SMSFs), releasing a statistical overview of the SMSF sector in December 2011. The report, which the ATO promises will be updated annually, gives us an insight, albeit a static and historical insight, into the wealth and behaviour of SMSF trustees.

For some SMSF trustees, the ATO findings will simply confirm what we already know about SMSFs based on our 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.

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 The 2009 report contained information from both publicly available and previously unpublished ATO data.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 has updated this earlier statistical summary by producing the report, ‘Self-managed super funds: A statistical overview 2008-2009’. The ATO intends to release another report at the end of next year.

This article is a potted version of the ATO’s latest statistical summary.

What does the ATO think of the report?

As a starting point, the executive summary from the report is set out below:

The SMSF sector remains the largest sector of the Australian superannuation industry, with 99% of the number of funds and over 30% of the $1.23 trillion total super assets.

At 30 June 2010, there were around 425,000 SMSFs and almost $387 billion in assets.2 There were also approximately 810,000 members in the SMSF sector, about 7% of roughly 11.6 million members in Australian super funds.

The data shows the SMSF sector responds to government initiatives or changing economic circumstances, particularly in relation to total asset holdings and shifts in asset types held. This is not inconsistent with the general view that SMSF trustees establish SMSFs for control and flexibility. Such observations take into account that 2010 data is not yet included in the majority of this overview’s analysis.

In recent years there has been a trend for members of new SMSFs to be from younger age groups than those of the total SMSF member population. Overall, SMSF members compared to non-SMSF fund members tend to be older and have both higher average balances and higher average taxable incomes.

SMSFs directly invested 76% of their assets, mainly in cash and term deposits and Australian listed shares (a total of almost 59%). Estimates of the return on assets for the SMSF sector show negative returns for 2007–08 and 2008–09. This is consistent with the total super industry, although the size of the negative returns was smaller for SMSFs. Estimates of the operating expense ratio of SMSFs shows a direct relationship with the asset size of the SMSF.

(page 3, SMSFs – A statistical overview 2008–9)

SMSFs are still the leader of the pack

SMSFs are the fastest growing sector of the Australian super industry for the 5 years to 30 June 2010. During this 5-year period, SMSF assets grew by 122%, while total super assets (including large funds) grew by 60%. The ATO reports that the growth in SMSF assets can be attributed to three factors:

• continued establishment of new SMSFs
• increase in contributions and net rollovers into SMSFs
• investment earnings

For more information on the growth in the SMSF sector see the full ATO report, 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, around 73% of SMSFs had individual trustees rather than a corporate trustee, as at 31 December 2010. n recent years there has been a shift away from corporate trustees: for the year ended 30 June 2010, almost 90% of newly registered SMSFs had individual trustees.

Accumulation phase or pension phase? Almost 70% of SMSFs reported they were solely in accumulation phase, and just over 30% reported they were making pension payments, for the year ended 30 June 2009. The SMSFs making pension payments (in pension phase) had been established, on average, for at least 5 years.

SMSF approved auditors. More than 11,000 approved auditors were involved in the SMSF sector as at 30 June 2008, conducting 33 audits each on average. In 2009, nearly 40% of SMSF auditors performed less than 5 SMSF audits in 2009, and 15% of auditors were also providing other services for SMSF clients such as tax agent, accountant or administrator.

Tax agents and accountants. Just over 16,000 tax agents and accountants looked after SMSFs as at December 2010, with just over 80% of SMSFS registered with a tax agent, and 98% of annual returns lodged by a tax agent.

How old, and how wealthy, are SMSF trustees?

According to the ATO report, around a quarter(26%)of SMSF members are aged 65 and over, while in the non-SMSF sector only 3% of account holders are over 65. Three quarters of SMSF members are under 65 as at 30 June 2010, and 80% of SMSF trustees are older than 45.

The gender balance of SMSF trustees is 54% male and 46% female, and nearly 70% of SMSFs have two members, and 23% of SMSFs have one member.

In 2009, 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 2009 was almost $86,500, compared to non-SMSF members who had an average taxable income of $48,900. SMSF members aged 35 to 49 had an average taxable income of around $110,000 compared to non-SMSF members in the same age group who had an average taxable income of less than $60,000.

Note: At 30 June 2009, the average SMSF member balance was $439,000 which the ATO reports to be almost 20 times the size of the average account balance of non-SMSFs (approximately $22,000).

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

What do DIY super fund trustees invest in?

Nearly 60% of all SMSF assets are invested in 2 asset classes – Australian listed shares (29.2%) and cash and term deposits (29.7%). In the two years ended 2008 and 2009, there was a shift away from listed trusts, other managed investments and listed shares and a move towards cash and term deposits, and direct property (residential and non-residential).

For more information on the types of SMSF investments and the typical asset allocation see the full ATO report, 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.

Note: While the methodology used to estimate SMSF performance resembles APRA’s, the data collected is not the same.

How much do SMSFs cost?

About two-thirds (64.5% for 2009) of SMSFs had an estimated operating expense ratio of less than 1%), with more than a third of SMSFs having an expense ratio of less than 0.25%

The average operating expense ratio fell steadily over the three financial years ended 2007 (0.72% or $6,000), 2008 (0.67% or $6,400) and 2009 (0.57% or $5,300).

Note: SMSFs with fund balances of less than $50,000 had a 7% 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 $656.23 for the 2009 year, with 50% of SMSFs paying less than $500 and 4% paying more than $2,000.

For more information on SMSF costs see the full ATO report, 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?

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