Shining a Government spotlight on SMSFs: a summary

On 10 December 2009, the Government’s Super System Review released ‘A statistical summary of self-managed superannuation funds’. Although mainly based on data as at June 2008, the document provides interesting insights into what the ‘average’ SMSF is doing in terms of fund costs, asset allocation and investment performance.

SMSFs are cheaper than other super fund options

For example, according to the Super Review, the operating expense ratio for the average SMSF was 0.69%, down from 0.86% in 2006, a fall of nearly 20%. Even if the costs remained at 0.86%, the SMSF structure is a very cost-competitive option compared with alternative super fund options (see article FEEding frenzy: super fund fees).

According to the Super System Review, these expense ratios are lower than the 1.2% typically estimated for the whole superannuation industry (including SMSFs). The one proviso however, is that, on average, small-sized SMSFs suffer higher relative costs and underperform larger-sized SMSFs. SMSFs, with $50,000 or less in assets, have average annual operating expenses of 5% to 6% of their total assets.

The average annual operating expense for a SMSF then declines in line with average asset size: 0.36% (2006 financial year) to 0.47% (2008 financial year) for SMSFs with more than $2 million in assets, according to the Super System Review document.

In dollar terms, the average SMSF operating expense has increased from $5,500, to $6,000 and to $6,500 over the 2006, 2007 and 2008 financial years, respectively. Note that the average individual SMSF account balance was $456,000 as at June 2008, and average SMSF fund balance was roughly $860,000 (based on average of 1.9 members per fund).

Average SMSF audit costs $664

Of the average $6,500 in operating expenses in 2008, the average audit fee was $664 – just over 10% of fund costs. On average, auditors providing other SMSF services charged $954 for the audit service, and auditors who provided SMSF audit services only charged $608. A surprising statistic is that over 50% of SMSFs reported paying less than $500 in audit fees, which I suspect may be due to the package deals offered by many of the online SMSF administrators.

More interesting facts about SMSFs

Other interesting SMSF statistics contained in the 40-page document include:

• Older and richer.Compared to members of other super fund types, SMSF members are, on average: older; earn a higher income; and have larger superannuation balances.
  • SMSF trustees are higher income earners. The peak earning years for Australian workers are generally in the age range 35 to 60. For SMSF members in this age range, their average annual taxable income is about $106,000, while for other types of superannuation fund members, the average annual taxable income is about $55,000 On average, over all age groups, SMSF members have an annual taxable income of $92,000, while members of other types of funds, on average, earn less than $47,000.
  • Larger account balances. As at 30 June 2008, the average SMSF member balance was $456,000, which is more than 18 times the average account balance of less than $25,000 for all superannuation funds with more than four members.
• Asset allocation. As at 30 June 2008, 58.8% of SMSF assets were held directly in two asset classes: Australian listed shares (32.4%) and cash and term deposits (26.4%). The default investment strategies of APRA-regulated funds, showed average allocations to Australian listed shares of 29% and fixed interest of 26%. For the three years ended 30 June 2008, the low exposure to overseas investments might have assisted the SMSF sector in out-performing other superannuation funds, as Australian assets generally performed better than overseas assets over this period.
• Investment performance. Over the three years to 30 June 2008, the asset-weighted average returns of the SMSF sector outperformed the non-SMSF sector. According to ATO estimates, for financial years 2006, 2007 and 2008, the return on assets (ROA) for the SMSF sector was 12.6%, 16.9% and -6.1%, respectively. At a whole of industry level, APRA-regulated funds with more than four members returned 12.2%, 13.3% and -7.8%, respectively. According to the Super System Review, the differences may be due to special demographic, asset allocation or tax factors.
• Average rollover amounts for new SMSFs. In the 2008 ATO new trustee questionnaire, 81% of SMSF trustees said they had existing superannuation accounts prior to establishing their SMSF. Of this group, 85% said they rolled over some or all of their existing superannuation into their new SMSF (the average rollover was $236,441, while the median value of rollovers was $130,000). The majority of trustees who transferred super benefits into SMSF, previously held this money in retail and industry funds.
• Average age of SMSF. An average SMSF has been in existence for 8 years. About 64% of SMSFs are more than 5 years old, and 38% are more than 10 years old. A mere 15% have been established for less than two years.
• Reasons for starting SMSF – control. Respondents to the 2008 ATO new trustee questionnaire, cited control of investments in 86% of responses as a reason for establishing their SMSF, while 46% of SMSF trustees ranked this as the principal reason. Other reasons include greater flexibility (64 %) over investment options and the belief they could perform better than their previous funds (53%).
• Individual trustees dominate. Around 71% of SMSFs have individual trustees, rather than a corporate trustee. In recent years, nearly 90% of new SMSFs have been established without a corporate trustee.
• Most rely on accountants/advisers. The 2008 ATO new trustee questionnaire shows that, at establishment, 72% of trustees consulted with a tax agent/accountant and 42% consulted with a financial adviser. Only 3% of SMSF trustees said that they did not seek any financial advice or support when establishing their fund. Since establishing their funds, new SMSF trustees said they paid for professional services such as the preparation of annual returns (74%), ongoing administration (49%) and legal services (49%). Only 11% of trustees said they self-administered and did not pay for any professional services.
• Use of tax agents. The SMSF sector is currently serviced by around 15,500 tax agents/accountants, with 81% of all SMSFs registered with a tax agent.
• Quarter of SMSFs in pension phase.As at 30 June 2008, 22% of all members and 27% of all SMSFs were fully or partially in the pension withdrawal phase.
  • Very few receive Age Pension. Of the members who were fully or partially in the pension withdrawal phase at that time, 5.2% also received a full or partial government Age Pension, or 1.2% of the entire SMSF member population.
  • Income streams linked to larger SMSFs. As at 30 June 2008, the 27% of SMSFs that were fully or partially in pension withdrawal phase owned 47% of all SMSF assets. The asset allocations in these funds were very similar to SMSFs in accumulation phase.
• Self-employed love SMSFs. Nearly 39% of all SMSF members are self-employed or derive their income from a business or partnership. Half of all SMSFs have at least one member who is self-employed or derives income from a business or partnership.
• SMSFs sometimes break the rules. Providing loans or financial assistance to members is the most common SMSF contravention, by numerical frequency, making up 20% of all reported contraventions. In-house asset and separation of asset contraventions are the most serious contraventions, by monetary value, each representing 26% of the monetary value of the total reported SMSF contraventions.
• Illegal access is serious but still in minority. ATO compliance activities identified 15 scheme promoters and 1,055 participants, forcing the ATO to suppress 500 SMSFs from ‘Super Fund Lookup’ because of suspected illegal early access activities and froze 17 bank accounts containing around $1.5 million.

The Super System Review’s summary document is an excellent reference for anyone interested in the SMSF sector, and essential reading for anyone considering making a submission to Phase 3 of the Super Review.

The Super Review has released the statistical summary on SMSFs, due to a concern that there was insufficient publicly available data on the SMSF sector. The greater concern was that this lack of public data would affect the quality and value of submissions relating to the SMSF sector in Phase Three of the ‘Review into the Governance, Efficiency, Structure and Operation of Australia’s Superannuation System’  (see bottom of article for more details on the review).

You can access the document ‘A statistical summary of self-managed superannuation funds’ here.

About the Super Review

The Government’s Super Review panel, chaired by ex-ASIC deputy chairman, Jeremy Cooper, is methodically reviewing the superannuation system in three phases – Governance (Phase One), Operation and Efficiency (Phase Two), Structure (including SMSFs) (Phase Three).

The Super System Review is set to publish its first report (on Governance) this month. Closing date for submissions for Phase Two (on Operation and Efficiency) is 14 December 2009, which coincides with the expected release of the issues paper for Phase Three: Structure (including SMSFs).