There are some crucial tips to take on board to ensure SMSF audits get finalised in a timely and fuss-free manner, without unnecessary and costly delays.
The SMSF audit season is upon us, and there’s nothing more frustrating than supplying your information to your SMSF auditor, only to have the audit delayed because you missed a couple of things, (or because trustees didn’t sign or date documents correctly).
Don’t worry, you’re not alone. Very few SMSF audits get finalised without additional requests by the auditor for missing information. And of course chasing up documents adds precious time to the audit, for both auditor and accountant, which can’t usually be recouped.
Some SMSF auditors try to make things easier by providing a checklist of the documents they need before the audit. Despite this, there always seem to be a few common ones that aren’t supplied in the first instance (most likely in the hope no-one will ask for them!).
It’s even an issue with online SMSF auditing. SMSF accounting software/platform providers don’t usually provide free storage on their cloud. And a large amount of compliance documents – such as the fund’s trust deed – still need to be accessed and reviewed by an SMSF auditor during the audit.
The good news is that with a bit of methodical preparation you can avoid a lot of this. So here’s our SMSF audit checklist to help get your SMSF audits finalised faster.
- ATO trustee declarations.Get your admin team to check the date of the trust deed, and make sure the trustees have signed it within 21 days of the fund being established.
- Confirmation of contributions.If more than one member receives material contributions, this document confirms which member received what contribution(s). It can be either a minute or a signed contributions report.
- Expired lease agreements.If the leasee has the option to renew the lease agreement, you need to provide a minute/letter stating that the option has been taken up. If there’s no option to renew, a new lease agreement must be provided.
- Trustee representation letter.Make sure that this has been signed and recently dated correctly by all trustees.
- Property rental valuation for related parties.Make sure that a rental valuation is included in the property valuation report, confirming that the rent received from the related party is at arm’s length.
- Property insurance.If the property is insured only under the trustee/s names, make sure the policy includes the fund as an interested party. Security of fund assets is extremely important, especially in a claim where the corporate trustee acts in other capacities.
- Work test declaration.If the member is over 65 and makes contributions, a work test declaration must be supplied. (Google ‘work test declaration’ for a template.) This requirement will hopefully change or disappear completely once the retirement age increases.
- Derivatives risk statement.If any of the trustees play in the derivatives market, a derivatives risk statement must be supplied, and signed by them. This is a separate document that analyses the risks and controls of using derivatives within the fund’s investment strategy.
- Previous year’s reports.You need to provide your new SMSF auditor with the signed financials, audit report and management letter for the previous year. (And yes, we know this isn’t always easy!)
- Related party property information.Whether the property is held by a related party or directly by the fund, the checks and verifications are the same. You need to provide related party property information in line with the SMSF audit checklist.
When you’re facing the ATO’s looming SMSF deadlines, it’s easy to lose sight of attending to the finer details, however in the long run it’s a lot simpler to take the time to get it right the first time. To quote Steve Jobs:
‘We had a fundamental belief that doing it right the first time was going to be easier and cheaper than having to go back and fix it. And I cannot say strongly enough that the repercussions of that attitude are staggering. I’ve seen them again and again throughout my business life.’
In spite of the hype about borrowing in SMSFs, one thing remains clear – the demand for purchasing property in SMSFs is real.
The latest Smart Property Investment/ Property Investment Professionals of Australia (PIPA) Property Investor Sentiment Survey, released at the end of 2014, indicates that despite talk of property bubbles, confidence in the Australian property market remains high.
Moreover, it indicates that property investment within SMSFs continues to grow.
Of the 627 respondents to the survey, 14.3 per cent stated that they had invested in property via a SMSF before, a significant increase from the survey result of 4.4 per cent in February 2014.
Furthermore, 21.4 per cent of surveyed investors said they planned to purchase a property via an SMSF within the next 12 months, an increase of 4 per cent from the last survey.
PIPA members sent the survey directly to their existing client databases. The survey was also completed by Smart Property Investment’s database of investors.
Those serious about achieving self-funded retirement know that one property will not do the job in providing them with the amount of passive income required to enjoy a retirement of spoils. If you combine the total percentage of those who own property in this survey you get over 84 per cent who own at least one property.
Positive sentiment continues
You’d have to be living under a rock if you didn’t know that the property market is performing well from an investment return perspective, given solid gains in values in our two major cities of Sydney and Melbourne – and good rental yields throughout most parts of Australia, providing a nice overall return to investors.
Almost 80 per cent surveyed believe now is a good time to invest in property.
This is a slight fall of five per cent from our survey early in 2014, but this percentage is still very strong. Budding and experienced investors continue to see opportunity in the property sector.
In addition, over 74 per cent of respondents said that if interest rates remain lower for longer they will consider further purchases.
This is somewhat of a logical response, as low interest rates combined with a good rental market makes the investor’s out-of-pocket contribution to hold the property less.
The other contributing factors are more reliable long-term reasons and one could take a calculated guess that when interest rates move higher in the coming years then low interest rates would be less of a key driver.
The positive sentiment story flows into further planned activity by those surveyed, with 68 per cent saying they plan to either buy their first investment property or add to their portfolio within the next 6 – 12 months.
The survey also looked at insights and planned activity over the next 6 – 12 months.
It showed existing property is still the main game for most investors.
When responses to price point were studied, it provided a lot more clarity about buyers’ intentions.
One in every two buyers are looking to buy below the median range of value on property across Australia.
Sensible really, given this is the range where most Australians can afford property, those surveyed haven’t lost sight of yield returns as well, and because buying property in this range is where most tenants can afford to pay the rental price range on offer.
Where to buy?
Achieving a great investment return in the property game is all about getting the location, the suburb and then property right within that location.
The survey provided a good insight into where most of the experienced investors are considering their options. Most investors see the best investment opportunities in the larger city locations.
And the question on most minds is what location is the best bet for returns.
Brisbane has been well supported in this survey at 56 per cent.
This is likely the result of seeing Sydney and Melbourne having a great time for the past 18 months.
Many think Brisbane, when you consider its values and affordability measures, has room for some reasonable value growth.
But those who think it’s as easy as picking a city and not worrying about the suburb need to think again and do more research on the right locations to increase the likelihood of better results.
Property has long been a popular investment selection among Australians and a growing selection among SMSF trustees.
The survey highlights the key reasons for its appeal, with better long-term returns the highest rating factor at 22 per cent, followed by less volatility at 18 per cent. Like most SMSF trustees, many property investors also like the idea of control at 17 per cent.
With the population aging and more SMSFs moving into pension phase, the ATO is now focusing on exempt current pension income, minimum pension payments and other key interest areas such as loans.
Exempt current pension income
The number of funds reporting exempt current pension income (ECPI) is growing. The ATO processed $16.8 billion of ECPI claims in 2013 and will continue to make sure it’s being calculated and reported correctly.
Here’s some help with calculating and reporting EPCI to avoid any problems:
- To be exempt from an actuarial certificate, the segregated method must be used for the entire income year regardless of when the pension is started. If the assets aren’t segregated from July 1, funds may face compliance action. This is because an actuarial certificate would be required before lodging the annual return in order to be entitled to claim ECPI.
- Where all fund members receive a pension for the entire year, there is no requirement to get an actuarial certificate or segregate the assets. Accordingly, any income from these will be exempt income and any capital gain or loss in relation to a segregated current pension asset must be disregarded.
- Declaring ECPI is not ‘optional’. This means that the income of an SMSF is either assessable or exempt. Income cannot be re-characterised simply by not obtaining an actuarial certificate. Therefore, where a fund is using the unsegregated method, an actuarial certificate is required to determine the portion of the fund’s income considered as exempt income. To promote correct reporting, the ATO has been making changes to the SMSF annual return (SAR) since 2012 and ECPI is no longer reported in the ‘deductions’ section.
- Where tax losses and outgoings in relation to exempt income exceed the exempt income, it should be remembered that the excess can’t be carried forward to be applied to reduce ECPI in future years.
Minimum pension payment
A super income stream can be taken to continue to claim ECPI where minimum pension payments are not made in certain circumstances.
A SMSF may self-assess where:
- The underpayment is small (less than 1/12 of the annual payment amount);
- They have not previously self-assessed the exercise of the general powers; and
- They have made a catch-up payment as soon as is practical after identifying the shortfall.
In all other circumstances the fund must apply for the ATO to exercise the general powers and must demonstrate the circumstances of how the underpayment were outside the control of the trustee.
The ATO has finalised 242 cases where SMSFs have requested the exercise of this exception and have allowed only 20 per cent. In the remaining 80 per cent of cases, the funds did not demonstrate that the factors preventing payment were beyond trustee control. For example:
- If the circumstance was a medical condition, it was not serious and was short term, with no supporting medical documentation.
- The circumstance that prevented payment being made was experienced by one/some but not all trustees. All trustees are equally responsible for running the fund and the commissioner expects that if at least one trustee is not affected by the circumstance in consideration this trustee can carry out the necessary administration.
- The error was not made by a third party (eg a bank) but due to a trustee’s incorrect asset valuations, or incorrect professional advice.
Paying pension on death
Earlier this year, two ATO IDs were published (ATO ID 2015/2 and ATO ID 2015/3) which dealt with lump sum death benefits where the beneficiary intends to re-contribute the death benefit back into the fund.
Broadly, to be a lump-sum super death benefit the benefit must be paid to the beneficiary. Journal entries are insufficient to establish that a super fund has paid a super death benefit. The death benefit must be paid to the beneficiary by transferring ownership of the deceased member’s assets to the beneficiary. This is not a new view and it shouldn’t be interpreted as applying to situations which don’t result in a lump-sum death benefit.
Non-commercial limited recourse borrowing arrangements (LRBAs)
Not every related-party limited recourse borrowing arrangement (LRBA) will give rise to non-arm’s length income (NALI).
Whilst the ATO won’t set benchmarks such as what is an acceptable interest rate, they will apply scrutiny to related-party LRBAs where the terms of the loan, taken together, and the ongoing operation of the loan aren’t consistent with a genuine arm’s-length arrangement (as in the type of arrangement you’d expect to get dealing with a third party, such as a bank).
Things that they will consider include the:
- Nature of the acquirable asset;
- Amount borrowed;
- Term of the loan;
- Loan-to-value ratio;
- Rate at which interest is charged, or the other means by which the lender is compensated for the opportunity cost in lending the principal;
- Regularity and frequency of principal repayments required and security taken for the borrower’s performance under the loan, given the limited recourse nature of the loan – for example, mortgages and personal guarantees by SMSF members; and
- Extent to which the loan has operated in accordance with its terms.
The ATO is encouraging those with multiple super funds to consolidate their super into one account, with 45% of working Australians currently holding more than one super fund.
According to the ATO, this figure is lower overseas with only 26.2% holding multiple pension funds.
Based on statistics from the Australian Prudential and Regulation Authority, the ATO said the median figure for fees and charges paid by Australians for a low cost super account is $532 per year.
The ATO said Australians are currently wasting thousands of dollars every year and by combining their super into one account, will reduce the amount paid in annual fees.
ATO assistant commissioner of superannuation John Shepherd said it is not uncommon for people to open a new super account when they start a new job, instead of taking their super fund with them when they change jobs.
“People might also have super accounts which they have lost track of, for example, they may not have updated their contact details with their funds when they moved house – there are still $5.8 billion worth of accounts in this category,” he said.
Mr Shepherd said there has, however, been a significant increase in Australians merging their super into one account with more than 265,000 accounts with balances totalling $1.13 billion consolidated in the six months to December 2014.
“In one case, 17 accounts were consolidated,” he said.
“This is a rise of 400% from the six months to December 2013 when 52,000 accounts worth more than $270 million were consolidated.”
Before consolidating, Mr Shepherd said individuals should look at the insurance cover they have with each fund, as it will be cancelled once they close their account.
“People should also make sure their super fund has their tax file number,” said Mr Shepherd.
“They’ll pay less tax on their super and it will help us to make sure all their super accounts are displayed online.”
Refusing to work with the ATO to resolve compliance matters is the “fastest way to have a non-compliance notice issued” says ATO director of SMSF risks and products Nathan Burgess.
Speaking at the SMSF Association conference recently, Mr Burgess said that while some compliance matters are too serious to avoid a non-compliance notice – such as those subject to wilful intent or extensive issues over an extended period of time – the ATO is trying to avoid handing down penalties through its new approach.
Mr Burgess said the phone calls from the ATO to SMSF trustees are not meant to be “We’ve got you calls”.
“We’re not looking to do it that way, we’re actually trying to avoid a formal audit of review, but in about one in ten funds it just has to be escalated – what I mean by that is during the phone call the person will absolutely refuse to deal with us and that gives us no choice,” he said.
Trustees who refuse to help the ATO resolve the issue or are simply too difficult, he said, are therefore more likely to have their fund deemed as non-complying.
“We know there’s an issue and we’re trying to avoid [it] but we need the [trustee] to say ‘Yes, I’m aware of it and we’re working on it’,” he said.
SMSF accountants and advisers need to ensure the client is fully across what they’ve done wrong and how it has been resolved.
SMSF practitioners need to have a conversation with their client about the issue so that when they receive the call from the tax office they actually know what they’re talking about.
Recent research has shown a growing interest in ETFs and managed funds within SMSFs, particularly in the December quarter.
ETFs now represent 4.2% of total SMSF assets and managed funds at 19.5%.
The survey, which covers 2,500 funds, showed over 29% of non-cash investments are now made through pooled vehicles.
The results also indicated a decline in allocations to cash and short-term deposits with the asset class falling from 17% in the September quarter to 16.5% in the December quarter.
Allocations to international shares rose from 11.7% in 2014 September quarter to 12.5% in the 2014 December quarter.
Investment in equities and managed funds is continuing to increase due to the low returns in other asset classes, especially cash and term deposits.
The results are hardly surprising, given the performance of international markets, particularly U.S. markets, versus the Australian market in recent times.
There is a lot of opportunity for growth in global markets and SMSF trustees are adapting their portfolios to align to growth areas.
Domestic equities continue to be popular for SMSF trustees with the major banks and Telstra continuing to top the list of most commonly held investments based on dollars invested.
But investors are also looking offshore for returns, and with the Dow Jones and S&P 500 at record highs, it’s difficult to ignore international opportunities.
The survey also indicated that contribution amounts increased to 92.3% over a two-year period.
Based on the results, in December 2014 quarter the average contribution per fund increased to $13,715, up from $6,585 in the December 2012 quarter.
The average contribution per fund is a positive sign that people are saving more for their retirement; this increase would also be influenced by the increase of the superannuation guarantee to 9.5 per cent and the effective use of contribution caps.
The final report of the Financial System Inquiry, which was released last month, asked the federal government to restore the general prohibition on limited recourse borrowing (LRBAs) by superannuation funds.
We believe that there are multiple reasons why this recommendation won’t be adopted.
Firstly, the prohibition on borrowing in super was originally lifted to remove uncertainty with instalment warrants.
There was a concern that while you have an instrument that in the very general sense of the word could be seen as a security, it is actually structured under Australian law as a loan.
There are significant differences in risk exposure between investing in direct property via a limited recourse borrowing arrangement and investing in an instalment warrant.
The risk that the inquiry is talking about seems to be more oriented around risks associated with the real property market rather than risks that would be associated with investing in vanilla instalment warrant products.
The recommendation does not seek to distinguish between those two scenarios.
Section 67A is an extension of the original exemption which was inserted to allow super funds to invest in instalment warrants like those offered for example in ‘T1′ and ‘T2′ issues of Telstra securities.
It was intended to remove doubt about whether such an investment involved ‘borrowing’, so removing it will simply reintroduce that doubt.
An across-the-board ban on borrowing may therefore be unwarranted unless the government believes instalment warrants pose a similar level of systemic risk as borrowing to purchase property.
Secondly, it seems unlikely that the government will risk “political capital” by banning LRBAs outright.
The recommendation is only one of the 50 points put forward by David Murray and out of most reviews, generally only five percent of all recommendations are taken up.
Recent research has revealed that almost 85 per cent of SMSF members aged 18 to 64 do not hold life insurance cover.
The research house found that over 630,000 individual SMSF members do not hold insurance, particularly in the Gen Y, X and baby boomer brackets.
This number of uninsured SMSF members is alarming, showing an enormous gap that needs to be addressed.
Part of the reason for the underinsurance, potentially, is that many trustees rely on an expert to assist them in their role as trustee and more often than not that expert is their accountant.
Accountants generally don’t have the authority to act as a financial adviser as well, so they aren’t raising the issue of insurance sufficiently with these trustees.
There is a significant opportunity for advisers to capitalise given the number of SMSF trustees that don’t have insurance.
While it is a great opportunity, the real concern here however is the personal situation of the self-managed super fund members.
They must take a serious look at protecting themselves and their family and their assets appropriately.
Below is a discussion about and list of the different types of insurance available to SMSF trustees and avenues to explore taking up these policies.
What are the advantages of holding your personal insurances inside of a SMSF?
- Provides protection against life events for the SMSF members.
- Tax effective when compared to holding and paying premiums as an individual.
- Use accumulated funds to pay for SMSF held insurances, better cashflow benefits than paying from your own wallet.
Disadvantages of having insurance in a SMSF:
- Tax is payable on some Life insurance and TPD benefits.
- Contributing to your SMSF solely to pay the insurance premiums are still counted against your super cap.
- Using SMSF funds to pay premiums will reduce the amount that you have to spend in retirement.
- Restrictions on the features and benefits available when compared to those held in your personal name.
Insurance products a SMSF can purchase:
- Life insurance
- TPD insurance with an “Any” Occupation definition
- Standard Income Protection insurance only
Insurance products a SMSF cannot purchase:
- TPD insurance with an “Own” Occupation definition
- Trauma insurance
- Comprehensive Income Protection insurance
How do I go about taking out SMSF insurance?
…speak to AIIG on 1300 730 797, we access all life insureres in Australia and provide advice as to why a policy is better suited to your needs than another one.
You will be asked during the application process who will own the policy. Where the SMSF is to own the policy then the trustees of the SMSF (or the trustee company) will be listed as the policy owners “as trustee for” the superannuation fund and the premiums will be paid from the fund’s account.
Why should I have insurance within my SMSF?
In August 2012 as part of its move towards “Stronger Super” the government introduced superannuation regulations requiring trustees of SMSFs to annually consider the insurance needs of their members.
As a result SMSF trustees need to consider whether to take out cover for each of their members and review this annually. In meeting this requirement the Trustees should consider the personal circumstances of each of the members of the fund including their income, assets and liabilities, any existing insurance cover they have and how they or their family would be impacted by their death and disability. Also it may be relevant to consider how the insurance could be used by the fund to extinguish liabilities or otherwise avoid having to dispose of a large asset to pay a benefit to a member.
This insurance strategy needs to be documented at least annually in the SMSF investment strategy or in the minutes of a trustee meeting. There are penalties which will apply if the trustees fail to address insurance in their SMSF.
Even without this legislative obligation there are a number of good reasons why the trustees of a SMSF should purchase insurance policies for their members.
Advantages of having insurance owned by your SMSF:
- Protection of members
Where a SMSF member is still working and accumulating wealth their death or disablement is likely to have a devastating effect on their family, particularly if they have debts and dependant children. In this case there is a strong need for Life insurance and TPD insurance which will provide a lump sum payment should this happen. For members who are retired with sufficient funds in their super fund to provide for their dependants in the event of their death or disablement this insurance will be less important.
- Tax effectiveness
For SMSF members it can be tax effective for their super fund to purchase Life and TPD insurance policies on their behalf rather than purchase them personally. The funds which the SMSF uses to pay the premiums are tax advantaged funds i.e. the contributions have only been taxed at the 15% super contribution rate. To purchase the policies personally the members would have to use after tax dollars.
If the insurance premiums are paid from existing funds in the SMSF the members will not have to find the cashflow to fund the premium payments each year. However if these payments will have an unacceptable impact on the member’s retirement balance the member should be encouraged to increase their superannuation contributions to compensate.
Potential drawbacks with having insurance in your SMSF:
- Cost and Pre-existing Health Conditions
If you are switching your superannuation balance from an existing superannuation fund to your SMSF you should check whether it is possible to maintain your existing insurance benefits by leaving a token balance in your existing fund. The insurance premiums offered by large superannuation funds are group rates and are likely to be cheaper than the individual policies your SMSF can purchase. This is particularly the case if you suffer from any health conditions which may result in exclusions or premium loadings being applied to your SMSF policies. Large super funds sometimes offer minimum levels of cover without medical underwriting and while this amount of cover may not be sufficient in itself it can be used as a base which is topped up with cover in your SMSF
- Super cap limits
In 2014/15 tax advantaged or concessional contributions to super are limited to $30,000 per annum (or $35,000 if aged 49 or over). If you increase super contributions to your SMSF to cover your insurance premium payments you need to remember that this increase will count towards this limit. If this results in you exceeding the concessional limit you will be charged a penalty tax on any excess.
- Reduced Investment Balance
If instead of increasing your contributions to cover the insurance premiums you allow your SMSF to draw down on existing accumulated funds to pay the premium then this will reduce the investment balance remaining to earn a return for your retirement
- Tax payable
Tax can be payable on Life insurance and TPD insurance payouts from super under certain circumstances. To find out more read below the sections on Life insurance and TPD insurance
What do the changes to the rules on what types of insurance super funds can hold ultimately mean for strategies such as cross-insurance?
The rules on what types of insurance super funds could take out changed from 1 July 2014. One strategy put at risk by the new rules was “cross-insurance” – a common approach in funds with limited recourse borrowing arrangements where:
– the fund has more than one member
– it also has a loan
– if Member A dies, the trustees don’t want Member B to be forced to sell the asset (either to pay out a death benefit or because they can no longer support the loan)
– the trustee therefore took out insurance on Member A’s life (and vice versa) with the intention of using any proceeds to effectively pay out the loan or the death benefit or both, rather than adding it to Member A’s balance and paying it to his/ her beneficiaries as part of a death benefit.
It is this last step – not paying the proceeds to Member A’s beneficiaries but rather keeping it in the fund for the long-term benefit of Member B that raised questions.
The new rules on insurance specifically highlight that new insurance policies (ie. those taken out after 1 July 2014) cannot provide for insurance “in relation to a member of the fund unless the insured event is consistent with a condition of release” (SIS Regulation 4.07D). It is easy to see how this provision rules out trauma insurance. Trauma policies pay out on an event such as a heart attack, stroke or other significant illness. While these may well be life-changing events, they are not necessarily covered under the usual superannuation conditions of release – permanent disability or temporary disability.
Cross-insurance was less clear. The cross-insurance arrangement above does describe insurance that is consistent with a condition of release (death), it’s just that on Member A’s death, the proceeds are not used to actually pay out a benefit in relation to Member A.
We, like many others, have been keen for the ATO to express a view on this issue.
Now they have – the ATO considers cross-insurance inconsistent with, and therefore prohibited by, the post 1 July 2014 rules.
What was a little unexpected was that their view on this very important matter affecting many funds with limited recourse borrowing arrangements would be expressed via three lines added to some web content.
Note that this doesn’t mean that policies before 1 July 2014 need to be unwound – they are grandfathered. However, it will be a critical issue for any fund with a large indivisible asset (eg. a property) that effectively covers more than one member’s entitlements. It will be particularly relevant for new limited recourse borrowing arrangements as the premature death of one member may seriously hamper the ability of the remaining member to continue to service the loan.
The annual statistical overview of the SMSF sector each year paints an interesting picture of the dynamics of an ever-growing industry that SMSF professionals and trustees should be aware of.
Outlined below are some interesting SMSF statistics from the report that shed important light on both trustees and professionals within the SMSF sector.
Younger entrant growth continues to rise
With the SMSF sector growing by about 29% between 2010 to 2014, it is the continuing evolution of younger trustees that is starting the shape the future direction of SMSF services. Whilst 82% of members were aged 45 years and older, the sector is now seeing significant growth in the 35-44 age bracket. What is interesting is that more individuals from their mid-30’s are considering SMSFs than ever before.
The ATO has indicated within the report that for the first time, the median age of SMSF members of newly established funds in 2013 was below age 50. Overlaying the average taxable income of SMSF members under 50 ($124,000), you begin to understand how larger amounts of mandated and non-mandated contributions by these individuals are pushing forward these considerations of starting an SMSF earlier than ever before.
A gender shift is occurring
An interesting aspect of the SMSF landscape is gender makeup of trustees. Whilst males have long been represented more within the SMSF sector, there has been a ‘shift’ in the proportion of female members, which now account for 47% of all members. What we are seeing amongst the new fund establishments is strong female population growth, with the quarterly statistics showing more women becoming members in most of the age ranges, with the exclusion of members over 64 years of age.
It will be interesting to follow this statistic within the SMSF sector, in particular the older member demographic. With female life expectancies naturally longer than that of males, one might reasonable suspect that within the next few decades, we will see females as the dominant gender amongst SMSF membership.
The SMSF sector is leading the way in retirement incomes
The post retirement tax concessions continue to swell within the SMSF sector, with 37% of all SMSFs claiming a level of tax exemption within their fund. Whilst only representing a little more than a third of the SMSF population, the representation of total assets in post-retirement is significantly larger. You only need to compare the average member balance of $523,814 against the average pension member balance of $922,554 to gain some perspective of the tax revenue forgone by government as a result of a fund’s tax exemption.
The SMSF sector is leading the way in post-retirement, with more than 93% of the fund members taking benefit payments as an income stream. This is substantially higher than APRA regulated funds, where in some segments continue to face challenges with a lump sum mentality at retirement. For SMSFs, Transition to Retirement (TRIS) has continued to grow (11.4%) as an attractive retirement strategy amongst SMSF members.
On average, SMSF members drawing income streams are taking benefit payments at the rate of 11.7% of the member’s account balance ($108k/$922k). One would naturally consider this amount relatively high in the context of managing longevity, however it is suspected that a proportion of these benefit payments would be contributed back into the SMSF each year through re-contribution.
Why do we continue to see individual trustees growing so fast?
It’s staggering to see individual trustees representing 92% of all newly registered funds in 2014.
Over the three years to 2014, there has been a 2% decline in the number of corporate trustees, even throughout a time where acknowledgement of this type of trustee structure is far superior (through Government review).
It is suspected that this approach to trustee structure may present some interesting challenges in the future, including issues arising under the trustee penalty regime.
The big SMSFs keep getting bigger
The 2012-13 financial year saw positive investment returns for the SMSF sector (10.5%), providing comparative performance returns to that of APRA-regulated funds. Being the fourth year of positive returns since the days of the ‘GFC’, it is interesting to note that the larger the SMSF, the better the return on assets. This is not a reflection of 2012-13, but is consistent in the five years of performance shown within the statistical summary.
The statistics show that 26.9% of larger funds (>$2m) have asset concentration of greater than 80% (one asset class), compared to more than 50% of funds with balances of under $500k. This demonstrates an inability for smaller-sized funds with high-levels of asset concentration to adapt to changing market conditions. In contrast, the larger SMSFs appear able to adapt better and would be more likely to seek advice – a combination that would provide for these higher net worth SMSFs to grow even further.