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Industry body rubbishes claims more SMSF regulation needed

Glenn Freeman  |  27 Jun 2016Text size  Decrease  Increase  |  

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The SMSF Association (SMSFA) has hit back at criticism of self-managed super funds (SMSFs) in a recent Fairfax newspaper, which claimed "there is an army [of 1 million SMSF members] ... headed for financial defeat".

The article, published in The Sydney Morning Herald print and online editions, highlighted particular concerns around SMSF trustees with balances of less than $200,000.

It points to comments from a financial services legal expert, John Berrill, who said: "SMSFs with small account balances up to $250,000 are not sustainable."

"One in four SMSFs have account balances of less than $250,000 and most are losing money."

In response to the article's assertion that almost half of all SMSFs lost or did not make money over the past seven years, SMSFA CEO Andrea Slattery said that, on aggregate, funds with at least $200,000 did not make a loss.

She also asserted Australian Tax Office (ATO) statistics show more than 79 per cent of SMSF balances exceed $200,000.

The article also quoted a number of sources who claimed a minimum SMSF balance needs to be introduced, which Slattery also addressed.

"This is a poor generalisation. The SMSFA does not believe there is a need to regulate a minimum balance or cost-breakeven point for SMSFs, and that consumers should be free to make a choice whether an SMSF is suitable for their needs," she said.

"Rather than a mandatory minimum balance, we believe that SMSF advisors should be having a meaningful discussion with potential SMSF trustees on the responsibilities and issues of establishing an SMSF where they have adequate SMSF knowledge and competencies."

"Eating themselves alive?"

Fees were also highlighted as an area of concern for low-balance SMSFs, with the article claiming they "will eat themselves alive" due to accounting and auditing fees.

Slattery believes the cost figures for low-balance funds can be distorted by a number of factors, including: delays in balance rollovers after 30 June ATO reporting; the practice of establishing a fund with a nominal initial contribution of around $10; and differences in the SMSF expense calculation methodologies used by the ATO versus APRA-regulated super funds.

Inadequate consumer protections?

"SMSFs are regulated, however, they are not prudentially regulated," Slattery said.

"SMSFs are regulated by the ATO through a compliance regulation approach ... [We] do not support the prudential regulation of SMSFs because it is incongruous to the nature of SMSFs, where trustees are required under the SIS legislation to manage their own retirement savings.

"Prudential regulation is appropriate where money is being managed on behalf of another person that has little ability to influence the trustee responsible for managing their retirement savings.

"We acknowledge that the ATO's SMSF regulatory activities have been appropriate and are effective to the extent that SMSF trustees are complying with the taxation and superannuation laws."

Responding to suggestions that corporate regulators ASIC or APRA should take over regulation of the SMSF sector, Slattery reiterates the "practicality" of the ATO continuing to regulate the sector, "due to their ability to undertake large-scale processing to regulate over 570,000 individual SMSFs".

"Moving the SMSF regulatory function to another regulator would require building a knowledge base and developing technological capacities to be able to manage regulating over 570,000 entities."

Property spruiking concerns

A perceived over-representation of direct property assets inside SMSFs was another criticism levelled at the sector in the Fairfax articles.

"Residential property only resembled 4.1 per cent of all SMSF assets as of March 2016. We do not believe this represents an over-allocation of assets or systemic risk to the sector," said Slattery.

Concerns around excessive rates of leverage inside SMSFs were also addressed.

"Allegations of 'loose finance' being a problem for the SMSF sector are not true, as lending to SMSFs has become significantly tighter since bank capital requirements have increased," she said.


Glenn Freeman is Morningstar's senior editor.

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