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Written by Per Amundsen, Head of Research, Thinktank
It’s a well-worn saying, “the devil is in the detail”. Only, in this instance, when it comes to the ATO’s self-managed super funds (SMSFs) statistics, the angel is in the detail. That’s the only conclusion that can be drawn from the regulator’s latest set of numbers.
Although SMSFs, like all investors, are having to cope with volatile markets, rising inflation, and central banks lifting interest rates in a bid to put the inflation genie back in the bottle, the latest ATO statistics reveal a superannuation sector that is in robust health.
Take SMSF establishments, for example. In the three financial years to 30 June 2020, their growth had slowed, only up a net 7673. Of that number, 61% or 4705, occurred in the 30 June 2020 financial year. But in the last financial year, SMSF growth accelerated, with net establishments of 12,413, nearly double the previous three years and had total SMSFs at 585,027 at 30 June 2021. In terms of SMSF members they stood 1,095,981, up nearly 6% from 1,035,469 at 30 June 2017.
There are two important take-outs from these establishment and membership numbers. First, and as expected, the pace of growth of SMSFs is slowing. Aside from the obvious mortality factor – remember, about 50% of SMSF members are in pension phase – there was always a finite number of people who wanted to take responsibility for their superannuation.
Second, and this almost seems counter intuitive, SMSF establishments pick up in times of crisis. At the very time it would seem individuals would seek the sanctuary of the APRA-regulated system and willingly hand the investment decisions to the “experts”, the opposite happens; they opt to take control of their own retirement savings. The previous surge in SMSF numbers was post the Global Financial Crisis (GFC) when individuals opted for the SMSF route after some APRA-regulated super funds failed to deliver.
Now there’s evidence it’s happening again. As noted, establishments started to take off again in the 12 months to June 2020 before almost trebling last financial year. It seems market volatility, higher inflation and rising interest rates are not proving a deterrent. Nor is COVID.
Asset allocation is another pointer to the health of the SMSF sector. Despite the COVID induced market volatility of more than two years, the figures show there has been no rush to drastically alter portfolios. Listed shares and trusts have risen nearly $50 billion or 20% in the year to December 2021 with a further $5 billion increase in the 31 March quarter (see Chart 2). Defensive cash and term deposits have fallen slightly in the same period, in part reflecting the low interest rate returns available. Growth assets increasing and defensive assets falling suggests sober assessments in difficult times.
Both residential and non-residential assets are up over 20% since December 2020 and the ratio of non-residential to residential continues at just under 2:1. Interestingly, this is consistent with our own experience at Thinktank with commercial or “business real property” being the more in demand SMSF investment than residential property.
Limited Recourse Borrowing Arrangements (LRBAs) also continue to grow at a slightly higher rate of 22% since December 2021 with the relationship with direct property investments staying at less than half, although this is not a direct Loan to Valuation Ratio (LVR) measurement as some SMSF direct property investments have no debt attached to them.
These LRBA numbers reflect what’s happening on this credit front at Thinktank. In the 2021-22 financial year, we saw a 31% increase in the dollar value of loans settled while the average size of the loans also rose 17%. Based on our experience, these LRBAs have conservative LVRs, helping explain why these debt instruments kept being serviced during the past two years, supported by the level of liquidity required to be maintained for good order within funds.
For the whole Thinktank LRBA portfolio at 30 June ’22, the Weighted Average LVR was 62%. The vast majority are on principal and interest repayments with only 7% interest only. The nature of the security Thinktank holds (the “single acquirable asset” funded) is 42.4% Industrial and 44.3% of the SMSF members are owner occupiers of the “business real property” that is used “wholly and exclusively” in their business as allowed for under the SIS Act regulations.
Another interesting statistic that can be drawn from the ATO numbers is the different asset allocation percentages by size of an SMSF. So, depending on the total assets an SMSF holds, what types of assets are invested in and at what stage do trustees consider using LRBAs to acquire assets?
The ATO numbers range from SMSFs with $50k in assets to over $50 million and are broken down into 11 categories by size. Cash and term deposits are highest among smaller-sized SMSFs while listed securities are consistent across all sizes at mid-20%.
Direct property and LRBAs become popular with SMSFs ranging from $200k to $1million with a fairly even split between residential and non-residential property. This changes quite noticeably once an SMSF passes $1million with non-residential growing and residential falling until a level of 2:1 is reached once SMSFs are between $2 to $5million. LRBAs also fall once an SMSFs reaches $2million.
These statistics also reflect Thinktank’s experience and, as such, are indicative of the sound quality we have seen in SMSF lending across the whole sector over time. It’s not just lending. SMSFs emerging relatively unscathed from both the GFC and COVID are a testimony to trustees’ investment acumen in troubling times within well managed, tax effective structures.
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