Recently, I was having dinner with some friends and one friend who works in the superannuation industry commented that DIY super funds, that is, self-managed super funds, were just for the super rich. The friend claimed that a lot of SMSF members have tens of millions of dollars in assets and earn mega-bucks and don’t deserve the
In this short article I respond to the following two questions:
- Do SMSF members earn mega-bucks?
- Do many (or any) SMSFs hold tens of millions of dollars?
Do SMSF members/trustees earn mega-bucks?
Generally, the answer is ‘no’ to the question whether SMSF trustees/members earn big bucks. The Australian Taxation office (date released in June 2012) reports the following about SMSF members:
- Nearly two-thirds (60%) of SMSF members have a taxable income of less than $60,000 a year.
- Just under half (46.6%) of all SMSF members have a taxable income of less than $40,000 a year.
- Around a quarter (26.4%) of SMSF members earn less than $20,000. Note that any
- Nearly three-quarters (72.2%) of SMSF members have a taxable income of less than $80,000 a year.
- Around 80% of SMSF members have a taxable income of less than $100,000 a year.
- Around 7% earn more than $200,000 a year, but that figures falls to 3.5% for female SMSF members.
The ATO table below shows the percentage of SMSF members who have a taxable income within each income range listed.
| Member demographic table – income ranges | |||
|
Income ranges |
Male |
Female |
Total |
| $0-$20,000 |
22.5% |
31.0% |
26.4% |
| >$20,000-$40,000 |
17.6% |
23.1% |
20.2% |
| >$40,000-$60,000 |
12.7% |
14.1% |
13.4% |
| >$60,000-$80,000 |
12.7% |
11.7% |
12.2% |
| >$80,000-$100,000 |
8.2% |
6.3% |
7.3% |
| >$100,000-$200,000 |
16.0% |
9.4% |
13.0% |
| >$200,000-$500,000 |
7.2% |
2.8% |
5.2% |
| >$500,000 |
2.5% |
0.7% |
1.7% |
| Unknown |
0.5% |
0.8% |
0.7% |
| Total |
100% |
100% |
100% |
Note: According to the ATO, the table above contains an approximate distribution of the taxable income of individuals who were SMSF members as at the end of June 2011. The data was extracted on 12 July 2011 and is an estimate based on ABR data and the member’s most recently lodged personal income tax return.
Source: SMSF statistical report – March 2012 (released in June 2012 by the ATO)
Do many (or any) SMSFs hold tens of millions of dollars?
The proportion of SMSFs that hold $10 million or more is statistically insignificant in comparison to the number of SMSFs that hold nowhere near $10 million.
According to the ATO, one-fifth of 1% of the 468,133 SMSFs in existence has fund assets of $10 million or more. In actual fund numbers, that works out to be 936 SMSFs. When you consider that there is nearly half a million SMSFs, anyone claiming that all SMSFs are like these very large 936 SMSFs is blatant misinformation. The total funds under management held by these 936 SMSFs is at least $9.36 billion (assuming each of these SMSFs holds $10 million), which is a massive amount of money but still only 2% of all SMSF money.
Although SMSF accounts are larger, on average, than the typical account held with a large super fund, the age profile of SMSF members is also a lot older than the typical member from a large super fund. What this means is that SMSF members have generally had more time to accumulate super and a SMSF is generally an option only if you have sufficient super savings to justify the cost of running such a fund. You can then safely assume that SMSF accounts, and SMSF fund balances, will be larger, on average, than the typical account with a large super fund.
Also, a SMSF balance generally represents two SMSF members which means that the fund balances quoted in the table below need to be halved to gauge the true size of SMSF account balances. For example, nearly three-quarters (73.2%) of SMSFs have fund balances of less than $1 million, and assuming most SMSFs represent two people, the statistics then suggest that nearly three-quarters of SMSF members have less than $500,000 each in super savings.
The real story on SMSF balances is set out in the list and table below. For more information on how SMSFs tick including where SMSFs invest money, how much a
In summary, the 468,133 SMSFs (looking after 895,387 SMSF members, as at March 2012) are spread across the following fund balance ranges:
- Around a quarter (24.2%) of SMSFs have less than $200,000 in assets
- Just over a quarter (25.9%)of SMSFs have more than $200,000 but less than $500,000 in assets
- Just under a quarter (23.1%) of SMSFs have more than $500,000 but less than $1 million
- An impressive 16.5% of SMSFs(around 77,000 SMSFs) have more than $1 million but less than $2 million
- Another 10% of SMSFs (around 47,000 SMSFs) have between $2 million and $10 million
- A mere 0.2% (936) of SMSFs have $10 million or more in assets.
|
SMSFs: Total asset range (fund balance) |
|||||
|
Asset Ranges |
2005-06 |
2006-07 |
2007-08 |
2008-09 |
2009-10 |
| $0-$50,000 |
11.0% |
9.0% |
9.7% |
7.8% |
6.8% |
| >$50,000-$100,000 |
8.1% |
6.2% |
6.4% |
6.8% |
5.9% |
| >$100,000-$200,000 |
14.1% |
11.3% |
11.7% |
12.5% |
11.5% |
| >$200,000-$500,000 |
27.1% |
24.0% |
24.7% |
26.2% |
25.9% |
| >$500,000-$1m |
20.7% |
21.6% |
21.8% |
22.2% |
23.1% |
| >$1m-$2m |
12.8% |
16.8% |
15.8% |
15.4% |
16.5% |
| >$2m-$5m |
5.3% |
9.3% |
8.4% |
7.8% |
8.7% |
| >$5m-$10m |
0.7% |
1.5% |
1.3% |
1.1% |
1.3% |
| >$10m |
0.2% |
0.3% |
0.2% |
0.2% |
0.2% |
| Total |
100% |
100% |
100% |
100% |
100% |
Note: According to the ATO, this table approximates the average assets per SMSF. These figures are estimates based on SMSF income tax and regulatory return form data for the 2004 to 2007 financial years and SMSF annual return data for the 2008 to 2010 financial years. The data was extracted on 12 July 2011.
Source: SMSF statistical report – March 2012 (released in June 2012 by the ATO)
If you want to find out more about how SMSFs tick then check out the following SuperGuide articles (updated regularly):
- SMSF investment: Where does all of the DIY super money go?
- Do you fit the profile of a ‘typical’ SMSF trustee?
- SMSFs lead the super pack, again
- SMSF confidential: the inside story on DIY super funds
- SMSF: How much does a DIY super fund cost?
Hi to Everyone again from John
I have another question which I am having difficulty finding an answer
It relates to the use of the SMSF ABN number
I dont necessarily want to do this but I need to get a ruling
In an SMSF, is it permissible to use the ABN number of the SMSF on an invoice for personal exertion work like such as a consultant etc
I think the trust deed section 6.2 (a) says
““the trustee is empowered to undertake any activity in which it would be capable of engaging as a natural person, including but not limited to
- the carrying on or participation in a business or joint venture””
I suppose its not too different to a salary sacrifice situation ??
Thanks for your help
John
Hi
can anyone tell me what is the advantage of having an SMSF when aged 65 or over ??
assuming will no longer will be making contributions (twill also be in pension phase) ??
However in the above case is it an advantage to have an SMSF say for example if selling an investment property in a year or 2 time from now ??
John
John
The advantage of having your money in super (as distinct from a SMSF) after age 65 is that the super fund, paying the pension, pays no tax on the income or capital gains it earns. (That pension is also tax exempt when paid to you if you are over age 60.) That means there should be more money left over to continue paying your pension for longer. This should be compared with income from investments outside super which will be taxed at marginal rates. This may be sufficient reason to contribute the proceeds of the sale of your investment property into super while if you still can.
Note that a couple over the age of 65 can earn $57,000 tax free income because of the tax offset available to senior Australians. That alone is enough to convince some retirees to vacate the super space altogether will all its attendant regulations.
If your question relates to the benefits of a SMSF compared to retail super there is much evidence to suggest that a SMSF provides greater control, more investment choice and lower fees than a retail or super fund but it comes with significant responsibility and fixed costs.
thanks john for yr reply
just a note though
if over 65 and not really earning large amount (say under $30K p.a. in casual work)
but substantial amount in super say $800K then what is advantage of SMSF as opposed to say an industry fund ?
thanks John
Under the present contributions cap of $25,000 it will take 400 years to accumulate $10 million in super. The unquestioned assumption in these comments is that all contributions to super are concessional.
We tend to forget that it is also possible to make non-concessional contributions to super at the rate of $150,000 every year. Even with the bring-forward rule, it is possible for a couple to contribute $900,000 every 3 years. As these are after-tax contributions, from the sale of a property or inheritance for example, there are NO taxpayer subsidy on these contributions. Prior to 2007, there was no limit on these contributions, and this may explain why there are some funds with large balances
Once inside super the income on these contributions will benefit from the well-known tax advantages of super. If the super fund is in accumulation phase the income will be taxed at 15%. In pension phase the income is tax-free. But the tax advantages are difficult to quantify because we do not know what proportion of these concessional contributions are in accumulation or pension phase and we do not know how these contributions are invested and what income they generate.
But given these tax advantages, it is surprising that more people do not make non-concessional contributions to lower their tax on their investment income both before and after retirement.
Hi everyone
Many thanks for your contribution to the debate. Just clarifying: although just under 27% of SMSFs have $1 million or more, note that the typical SMSF has 2 members (around 70% are 2-member funds) which means the SMSF fund balance needs to be generally halved to get an indication of account size for individual SMSF members. A $1 million fund generally funds the retirement of 2 people.
Keep the comments coming
Regards
Trish
Arrow,
I agree. If an SMSF member has contributed $1m and so “paid” $150k in contributions tax (less any reductions from say imputation, which could eliminate all contributions tax) then, if on the top tax bracket, they would have “saved” over $475k in personal tax, including medicare levy. The difference of at least $325k would easily fund what would have been their age pension entitlements.
It is reasonable to use the system as currently designed. In my opinion, the current design is not sustainable as the cost to the budget of the tax foregone is massive and growing.
Let’s just admit that taxpayers subsidise tax concessions in SMSFs. The concern is to what extent the taxpayer should subsidise SMSFs when the trustee/members have amassed more than enough money inside the SMSF to provide for their own retirement. This doesn’t just apply to SMSFs – it’s an argument that’s relevant to any high account balance holder in superannuation. To the extent that an SMSF (or any other super fund) is used to park investments in a concessionally taxed environment, over and above the retirement needs of the members, taxpayers are subsidising the discretionary incomes of those people. They have gone beyond subsidising those members’ provisioning for their own retirement – they are now subsidising those members’ wealth accumulation over and above their retirement needs. This is done at the expense of other government priorities, which may include health, education, increasing the old age pension, or increasing unemployment benefits.
The concerning element in the figures provided is that over 25% of SMSFs have more than $1m in them. There is an emerging concern about the taxpayer subsidy in the superannuation sector and the focus on SMSFs is simply because that is where a lot of large account balances are. You might be able to argue that you need $1m in retirement, but anything above that should be under scrutiny by government when it comes to providing tax concessions.
A wage earning taxpayer’s superannuation contributions are paid for by their employer so it could be argued that ordinary superannuation contributors are subsidised by their employers. Conversely, most SMSF contributors generate their own contributions. Unfortunately, most of the ordinary superannuation contributors were in growth funds in 2008 and they have lost up to 75% of their capital. When they retire they will not have enough to live on from their super so the taxpayer will be subsidising them through the aged pension supplement. It is not easy to accumulate $1 million dollars for retirement but some of us who are truly independent have done it and along the way have paid at least $150,000 in contributions tax, some surcharges plus the taxes on the fund while it was still in accumulation mode. You are one of the people I referred to in my previous post who ignore this.
Even though one may have $1 million in their SMSF (probably in cash) the returns are very lean at present and $50K a year isn’t exactly an amount that guarantees a luxury lifestyle. If the tax free concessions were not available the net return would force us to claim part of an aged pension to survive. I know public servants in defined benefit retirement on twice this amount and the taxpayer subsidises it 100% but you don’t seem to have a problem with this.
I am amused by your claim that you are a taxpayer an a future self-funded retiree.
1. The statistics reported in the post are from 2012. The 2008 meltdown is irrelevant.
2. Everyone pays tax. If you earn more than 40K per year, your superannuation salary sacrafice, income earnings, and pension payments are all tax advantaged. What’s not at issue is the 150K you pay in tax, it’s the tax you’ve saved due to the superannuation system existing.
3. I’m not sure why you find it hard to believe ‘taxpayer’. I’d assume that the type of person to read superguide is:
a) a ‘saver’
b) of above average income
What appears to be the difference here is that some people look at the superannuation system and say ‘I’ll take advantage of it, but why is it so generous to the rich?’, while others say ‘keep your hands off super, I’m going to get all that I feel I’m entitled to’.
‘Taxpayer’ references retirement ‘needs’, and a $1 Million threshold. I was more generous and allowed $2M in super in order to avoid the partial age pension, in effect assuming ‘reasonable wants’. In either case, why should the average Australian taxpayer support a super system that provides billions of dollars in tax breaks to support a lifestyle in retirement that is better than the average Aussie will ever have?
The use of $10 million as a “meaningful figure” probably is because this is the figure that Professor Richard Denniss from the Australia Insitute uses when he attacks the tax free status of account based SMSFs. I wrote to Professor Denniss some months ago asking him where he got his information from but he declined to give it to me. It is really all about envy and class warfare. The fact that someone who may have amassed $10 million by contributions to a SMSF has paid $1.5 million in contributions tax is conveniently overlooked.
It’s not clear to me whether this is an honest analysis which is constrained by available information, or the deliberate construction of a strawman argument. In Australia both the income and wealth distributions are ‘right-skewed’ such that the median value is less than the mean value, and there are more ‘below average’ individuals than there are ‘above average’ (assessed against the mean).
You’ve demonstrated here that the argument ‘all people with SMSFs are rich’ is a false stereotype. However, that argument may be an inarticulate effort to argue that ‘the benefits of SMSFs disproportionately benefit the rich’, or ‘super funds of an arbitrarily defined high value are unjust’.
The analysis presented here suffers from the same problem as many societal-level analyses. It’s meaningless to tell us that there are far more people in the 99% than in the 1% (or top 10%). Meaningful questions arise when we ask ‘what is the situation among the 1%?’.
A number of interesting questions which are not addressed here might be:
What proportion of individuals on high incomes (80K? 150K? 300K?) have SMSFs? How does this compare to more modest income levels?
How do the savings change by age and income level?
What is the implied public subsidy offered by superannuation (versus conventional taxation rates for investments)? How does this change by super value and income/age distribution?
What proportion of the tax benefits arising from super accrue to the top 50% of income earners? Top 10%? Top 1%?
Hi Arrow
Thanks for your comments. You ask some valid questions which are worthy of debate, but this article was designed to answer only two questions in response to misinformation regarding SMSFs:
1. Do SMSFs earn mega-bucks?
2. How many (if any) SMSFs hold tens of millions of dollars?
The issue of tax concessions and who receives them is a debate that can equally apply across-the-board to all transactions and investments, and was not intended to be covered in this article.
Having said that, the point of a concessionally taxed environment is to encourage taxpayers to save in a certain way, in this case, to reduce the reliance on the Government (taxpayers) in retirement. The majority of Australians who have taken their retirement planning seriously have done just that – whether it be via a large super fund or a SMSF.
Anecdotally, my contact over the years with SMSF trustees at speaking events, or via email, is that the majority do earn higher-than-average incomes (although not really high incomes) but significantly they have started retirement planning early and through dedication, prudent investing, and living within their means they have accumulated a decent nest egg. They have done exactly what the Government has asked of them, and they receive less (or no Age Pension, in more cases than the rest of the population) which over a person’s retirement saves the Government (taxpayers) a lot of money.
Now, whether the balance is right between tax concessions, long-term savings in Age Pension payments, reward and equity is an issue that I cannot discuss without further data.
Regards
Trish
Hi Trish,
Thanks for your response. I’d still point out a couple of things:
1) There’s no indication here of whether the SMSF holders are in career or retired. The stated proportions of relatively low income earners (60K or less) are not that meaningful, if they correspond to a SMSF member with high prior incomes, and low stated taxable retirement income (ie. a 200K earner who retires with a super of 3M, and then has a taxable income of 20K).
Do the reported figures accurately reflect income earnings, or may they be biased by wealthy retirees with low reported incomes?
2) The statement regarding the wealth held by >$10M super holders is met with one caveat (at least) but is fictitious. At an absolute minimum, $10+M super funds hold 2% of super fund wealth, but that could easily be 5% or 10%, depending on how skewed the distribution is.
3) I don’t understand why $10 Million is a meaningful figure. Your recent articles ($2 Million retirement) suggest that a sustained withdrawal from a $2 Million super for a couple can be expected to result in partial age pensions only if the couple lives into their 90′s and do not lower their expenditures as they age.
If the average super fund member in the 2M-10M range has a fund balance of $5 Million, the collectively would hold $235 Billion, of which $141 Billion is above the 2M threshold that I’m assuming is the cutoff for reducing public responsibility for the age pension. If super offers an average tax discount of 15% (which is an extremely conservative assumption for individuals in this wealth level), the implied public subsidy is $1.27 B per year, or $2.55B if the tax subsidy is 30%.
There are two primary messages that arise from this discussion:
1) You can’t talk about the super rich or 1% without accounting for the skewness of their wealth. Taking the baseline measure ($10M) is meaningless.
2) Given your $10M cutoff point, you’re correct, Australia’s ‘super rich’ don’t collect the bulk of benefits arising from SMSFs. However, I think you’re letting the upper middle class off too easily, by valorizing their sacrifice in ‘doing the right thing’ to stay off the age pension. The Australian taxpayer subsidizes SMSF holders to the tune of billions of dollars per year above and beyond account balances that would minimize age pension obligations.
Sorry, those tax figures are based on a 6% return (ie. term deposit/ high interest savings account). I don’t see why the tax differential would change for dividends or capital gains.