“We actually think it’s unlikely that the market has hit saturation point,” said managing director of The SMSF Academy, Aaron Dunn. “The question that needs to be asked is whether the stats are reflecting a current lack of direction on the part of Government and an accompanying loss of consumer confidence in retirement savings policy.”

Mr Dunn said the 2012 Intimate with SMSFs report (the report) from SPAA/Russell research sheds more light on SMSF numbers.

“The report does confirm that new establishments for the December quarter were the lowest since June 2008, when the ATO starting publishing these statistics,” he said, “but on an annualised basis, the 2011 calendar year saw 33,114 new funds established. That’s more than 5% more than the previous year.”

On a net basis, the numbers look even better. “Only 2,769 funds wound up during 2011, so net percentage growth was 67 per cent.”

Mr Dunn also said the growth in younger entrants to the SMSF market presents a great opportunity to advisers.

“Data from the report shows that more than a third – 35.1 per cent – of new members were under the age of 45,” he said.   “They represent a great opportunity to advisers who are prepared to deliver education and advice in an engaged way that resonates with this web-savvy group.”

Mr Dunn said scaled advice is likely to be appropriate for this sector of the market. “In my view, the scaled opportunity presents an exciting time ahead for SMSF advisers,” he said.

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“The Overview confirms some very interesting macro information,” said Aaron Dunn, Managing Director of The SMSF Academy. “For example, it confirms what the industry has long suspected – that there has been steady growth in the sector, both in the number of funds and also in total super assets. Significantly, there has been a jump in the number of younger people – those in the 35-54 age group – setting up their own funds. This suggests that SMSFs have moved from being a retirement vehicle for baby boomers to a retirement vehicle of choice for people who wish to become more engaged in their superannuation savings.”

Mr Dunn said the Overview also reveals the continued growth in SMSF net flows which includes total contributions and benefit payments. “These statistics support that not only did the Simpler Super reforms provide an incentive to get money into super, but also to take money out – in the form of benefit payments – particularly for those aged over 60,” Mr Dunn said. “This could be also due, in part, to the popularity of transition to retirement strategies.”

However, Mr Dunn said that while the macro information contained in the Overview was useful, in order to better understand all the elements within the SMSF life-cycle, and to aid the SMSF industry’s response to the Stronger Super reforms, the Overview needs to also look at the statistics from a micro level.

“Disappointingly, we see no break down in the contributions, in particular member contributions, that are provided as off-market or in-specie asset transfers. This information is readily available within the SMSF Annual Return,” Mr Dunn said. “Not providing this information hampers the SMSF industry’s ability to put forward a valid argument on the Stronger Super reform recommendation to abolish the off market transfer of listed shares into SMSFs from 1 July 2012.”

Mr Dunn said that the Government has responded to a Cooper Review recommendation to ban off market transfer of listed shares predominantly on hear-say. “It would be valuable to not only look at contributions to SMSFs at a macro-level, but also understand how these contributions got into the fund – for example, as business real property or listed shares transfers.”

Mr Dunn said providing more information on benefit payments and how they are being withdrawn would also help the industry and the Government better understand the direction retirement income stream policy needs to be taken in the future.

“As longevity risk is one of the biggest issues this century, it would be good to be able to identify things such as whether, on average, members are living beyond their means and from that information estimate how long their money will last against their average life expectancy.”

Key Findings from the Overview:

• Only one in every 10 new SMSFs established are within a corporate trustee
• While growing in the area of post-retirement benefits, very few establish funds and commence income streams immediately (only 11%). 49% of funds commencing pensions within 2009, had been in existence for five or more years
• The concept of a ‘family fund’ doesn’t appear to be gaining traction… only 4% of funds have three or four members
• The entry point for SMSFs appears to be dropping. Growth has occurred in all ranges up to $500k. This may be due to performance dissatisfaction as a result of financial markets – historically the number of new SMSFs has grown in poor financial markets Conversely, there has been an asset size decline in member balances >$500k. This will have come about from a variety of reasons including the impact of GFC coupled with an increasing trend in benefit payments
• SMSF trustees appear to have taken an active response to their investment strategy as a result of the GFC, with a move to cash and term deposits. Holding of real property has also grown which would incorporate the law changes to allow limited recourse borrowing from 24 September 2007. It will be interesting to see in future data, when SMSF trustees look to make that shift back into listed equities.

The ATO Statistical Overview 2008-09 is available at the following link http://www.ato.gov.au/corporate/content.aspx?menuid=0&doc=/wp-content/00301485.htm&page=1&H1 More discussion on this topic is available now on Mr Dunn’s blog thedunnthing – www.thedunnthing.com

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SMSFs were one part of a broader review in the governance, efficiency, structure and operation of Australia’s Superannuation System.

“The Government has endorsed, without any compelling data to support its decision, and despite strong opposition from the appointed SMSF Working Group, a recommendation from the Cooper Review to remove an SMSF’s ability to receive in-specie contributions or in-specie transfers of listed shares,” said the SMSF Academy Managing Director, Aaron Dunn.

The recommendation made by the Cooper Review suggested: ‘… where an underlying market exists, all acquisitions and disposal of assets between SMSFs and related parties must be conducted through that market.’

“The outcome is disappointing given that the SMSF Working Group, along with several professional bodies, including SPAA, put forward a framework which addressed concerns raised in relation to the potential abuse of contribution caps and capital gains tax, and would allow off-market transfers to continue,” Mr Dunn said. 

Mr Dunn said a statistical summary into SMSFs had debunked many of the myths around SMSFs but the SMSF Annual Return had only recently captured in-specie transfer information.

“Unfortunately, I think the Government’s decision has been based on hear-say rather than on sound statistical evidence,” he said. “I’m still unaware of any compelling data that justified this decision.”

Mr Dunn said a more sensible approach would be to adopt a set of industry based guidelines to legislate on the issue for all superannuation funds to ensure that there is no manipulation of contribution caps or capital gains tax.

“We will continue to lobby the Government on this issue to ensure that there is an even playing field for SMSFs and listed shares,” he said.

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“The ATO is now crystal clear on a lot of contentious issues around limited recourse borrowing, which were frustrating both trustees and professionals,” said The SMSF Academy’s Managing Director, Aaron Dunn. “The draft ruling gives them some much-needed guidance when making decisions around borrowing to invest in property.”

The ATO has defined what constitutes an acquirable asset, a single acquirable asset and a replacement asset and has made the distinction between repairs and improvements.

“The SMSF industry has been arguing long and loud since changes were introduced from 7 July 2010, that the strict interpretive view taken by the ATO in defining the acquired asset by its legal boundaries was too narrow and that it needed to consider the economic substance of the asset,” Mr Dunn said.  “The ATO has not adopted these industry views, however, the draft ruling considers both the legal form and the substance of the asset acquired.  This has many positive implications, in particular it allows trustees to use cash in the fund to improve an acquired asset.”

Mr Dunn said this means that SMSFs with cash reserves are likely to find older properties in need of renovation more attractive propositions, while SMSFs that need to borrow to invest in property are likely to find newer properties, including those available off the plan, more attractive.

However, Mr Dunn said that the draft ruling represents only the Commissioner’s preliminary views on limited recourse borrowing arrangements and the public can still make comments until 28 October 2011.

“While the draft ruling provides direction to the industry so that it can begin to move forward with some degree of confidence, it is important to remember that it is still only a draft ruling,” he said.

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