Lisa Papachristoforos runs through some common SMSF misconceptions with the SMSF Association’s Deputy CEO/Director of Policy & Education, Peter Burgess, and explains what prospective SMSF members can do to be well informed about the industry.
Misconception 1: You are on your own
My main catchphrase is that running an SMSF does not mean being self-directed. Peter agrees, stating, “the full benefits of an SMSF are only realised when others are involved.”
He went on to state that “aside from the annual audit of your SMSF, which must be done by an independent approved SMSF auditor, you can choose the level of compliance and administration work you outsource to others. However, as the trustee of your SMSF, you remain ultimately responsible for ensuring your SMSF complies with the superannuation and taxation laws. The SMSF sector has evolved over the past few decades and there are now many firms that specialise in providing administration and compliance services for SMSF trustees. There are other firms who are well equipped to provide investment advice and assistance with the formulation and execution of SMSF investment strategies.”
With nearly 600,000 SMSF’s as at 30 June 2020, and over 1.1 million members of SMSFs, this mature industry has many willing and able professional participants available to assist superannuants.
Misconception 2: I need to have at least $500,000 to start an SMSF
It was 12 months ago that ASIC issued its information sheet INFO206 stating that SMSFs should have a balance of at least $500,000 in order to produce returns after expenses and tax equivalent to an APRA regulated super fund (NB SMSF’s are regulated by the ATO).
ASIC cited the Productivity Commission to support this statement, and went further by stating an SMSF with less than $500,000 is not in a member’s best interest, and that the typical cost of running an SMSF is $13,900 a year.
Those are big numbers, and as you can imagine, this caused a lot of debate within the industry, especially in regards to SMSF establishments and those SMSFs in their early stages and still finding their feet.
But there’s plenty of data available to debunk ASIC’s SMSF commentary. Of note is the ATO’s quarterly statistical reports, the latest being the June 2020 report.
It highlighted that the median assets per SMSF member was $423,726 for the 2018/19 financial year, up from the 2014/2015 median of $333,460, and that only 6.7 per cent of SMSFs have a balance of less than $500,000 (table 8.2 of the same report)
Most notably, the ATO’s June report, a compilation of data derived from lodged annual tax returns of SMSF’s, shows that the midpoint of annual administration and operating expense for an SMSF for 2018/19 was $5,989. (For those interested, I’ve derived this figure by using $3,443 million of total administration and operating expenses for all SMSFs from table 10 divided by 574,835 SMSFs in existence per table 1.1).
Moving away from the data, my on-the-ground analysis is that with nearly 30 years of compulsory superannuation contributions backing many individuals, it is not uncommon to see two members commence an SMSF and have more than $500,000 between them.
Furthermore, it’s becoming commonplace to see an increased engagement with superannuation savings once an SMSF is established, especially if commenced with low member balances.
In this case, members end up contributing large non-concessional contributions within the first couple of years of establishment, and proactively managing their personal deductible contributions. And as an SMSF practitioner, unless your SMSF is being prepared by a Big 4 accounting firm, or middle tier (or top 50) accounting firm, there is no reason for annual administration fees to be anywhere near $13,900.
ASIC’s arbitrary figures of $500,000 and $13,900 miss the mark on so many levels.
Despite ATO data being easily available to ASIC and the Productivity Commission, combined with mounting feedback from the industry, ASIC is still pondering whether to revise their information sheet.
While they consider a revision, superannuants continue to be misled with figures of $500,000 and $13,900, adding more fuel to the fire of this misconception.
What can people do
For current SMSF members, Peter notes that it is important that “SMSF members understand the strict rules which apply and that they do not access their superannuation savings early from their SMSF, even if it is only for a short period of time. If structured and managed correctly, an SMSF can provide many benefits so it pays to seek professional advice, preferably from a licensed SMSF specialist, to ensure the full potential of your SMSF can be realised.”
Your path to a prosperous retirement doesn’t need to be a path travelled alone.
SMSFs are not for everyone, and superannuants need to be prepared to invest the time and effort to oversee the SMSF.
For prospective SMSF members, Peter’s message is to “do your research and make sure you understand what’s involved in setting up and running an SMSF. A survey of around 500 SMSF trustees conducted by the ASIC back in 2017 found 38 per cent of SMSF trustees found running their SMSF to be more time consuming than expected, and 32 per cent found the cost of setting up and running their SMSF was more than expected. A recent survey of SMSF trustees conducted by the SMSF Association found the majority of SMSF trustees spend between one and five hours a month administering their fund.
The SMSF Association survey also found 90 per cent of SMSF trustees were satisfied with their SMSF and eight out of ten trustees believe their SMSF provides good value for money.”
There are many different participants involved in the superannuation industry. While all of them have vested interests, they all have one common objective, and that is the best interests of superannuants, irrespective of the retirement product they choose.
That’s why it’s so important to get information from a wide variety of sources, being public entities such as the ATO and ASIC, professional associations such as the SMSF Association, subscription services such as Eureka Report, and product providers such as industry super funds and retail super funds.
In totality, this collection of information provides a rounded set of views to make a decision that’s the right fit for you.