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SMSF peak body sounds diversification alarm as pandemic bites

Glenn Freeman  |  07 May 2020Text size  Decrease  Increase  |  
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The corona sell-off is delivering self-managed super fund trustees a sharp reminder about the risks of a narrow investment focus.

Australian investors are notoriously home-biased in their investment portfolios. SMSFs allocate only 11 per cent of their total portfolio to international shares, according to a study conducted by research house Investment Trends and fund manager Vanguard Australia.\

Morningstar regularly emphasises the importance of diversification, which involves spreading your investment risk across different asset classes and markets.

This is also a key message of the Self-Managed Super Fund Association.

"I think this period well be the strongest lesson that the market has delivered about not being diversified for many years," says SMSFA chief executive John Maroney.

"If your plan was to draw living expenses from the interest on cash deposits and bank shares, and suddenly the cash rate is down under 1 per cent and heading close to zero, then I think that'll send out a very loud message about the dangers of not being diversified. And it will be a painful lesson for those that are effected."

Bank woes spotlight concentration risk

Maroney says the typical SMSF holds $272,000 in Australian shares. And bank shares often represent up to a quarter of these investments.

Big four bank share prices are down between 30 per cent and 40 per cent since the middle of February.

Westpac Bank (ASX: WBC) on Monday became the latest bank to report half-yearly earnings that Morningstar equity analyst Nathan Zaia describes as "a result to forget." This follows similarly downcast results from National Australia Bank (ASX: NAB) and ANZ Bank (ASX: ANZ).

NAB announced a 64 per cent cut to its dividend on the back of an $807 million provision for coronavirus losses. The other two banks deferred their dividend decisions, foreshadowing a likely cut or even cancellation of this year's dividends.

Maroney says bank shares often represent up to a quarter of SMSF's total share holdings. Based on the average SMSF allocation to bank shares, these could have produced a dividend return of between $3300 and $4100 based on previous yields.

In recent months, several superannuation regulatory changes have been introduced in the wake of the pandemic, which has wiped more than 36 per cent off the ASX 200 between mid-February and 23 March. Local shares have pared some of these losses as lockdown measures are eased, but are still down 25 per cent from the pre-corona peak.

The most prominent of the super regulatory changes are the early release measures, which streamline existing financial hardship conditions to provide access to retirement savings. Individuals who are seeking work, are unemployed or whose hours have been cut by 20 per cent can draw up to $10,000 from their super within each of the 2020 and 2021 financial years.

In the first week of the government's relief measures, APRA data released on Monday revealed $1.3 billion was released from super funds, with an average payout of $8000. Government estimates suggest up to $27 billion could be withdrawn over the next two years.

Most of these withdrawals will come from MySuper accounts, particularly within industry funds including Hostplus and Rest Super, whose members work primarily in the hard-hit hospitality and retail sectors.

Maroney expects only a moderate effect across less than 5 per cent of SMSF trustees. "I would expect at most between $1 billion or $2 billion in withdrawals from SMSFs over the next six months," he says.

"It could be higher, but most SMSFs are in retirement phase, so could be taking that money out if they wanted to anyway."

Minimum withdrawal rate slashed

On the contrary, a large number of trustees already in retirement phase and drawing an SMSF pension were keen to reduce the minimum annual withdrawal amount.

Maroney says this has been the most popular area of inquiry among its financial adviser and individual member base.

This minimum withdrawal rate has been halved to 2 per cent for the 2019/20 and 2020/21 financial years. Effective as of mid-April, the revised rates are as follows:

Draw down ratesSource: Heffron Consulting

At the previous minimum drawdown rate of 4 per cent, someone with the maximum $1.6 million of concessionally-taxed money in their SMSF pension was previously required to draw down $64,000 individually, or $128,000 as a couple.

"People were understandably unhappy about having to draw down from their fund at a time of historically low share prices," says Graham Hand, managing editor of Firstlinks.

This minimum withdrawal rate was also halved during the global financial crisis of 2008-2009.

Hand expects there will be widespread adoption of this reduced rate, especially as many SMSF trustees have additional non-super money they can draw on. "Given the tax advantages of leaving money in the super environment, they'll be happy to leave it in there," he says.

Rent relief

The rental relief provisions introduced by the government also hold implications for SMSF trustees who own property via their fund.

Almost 12 per cent of SMSFs own non-residential property, usually a small business premises.

LRBA SMSF

Source: ATO

Superannuation legislation overseen by the Australian Taxation Office requires all investments made by an SMSF to be conducted on a commercial “arm’s length basis.”

Any property owned by the fund must meet the sole purpose test, which means it:

  • Solely provides retirement benefits to fund members;
  • Can't be acquired from a related party;
  • Must not be lived in or rented by a fund member or any related party.

Alongside the concessions on loan repayments and fees introduced by Australian banks in response to coronavirus economic fallout, the government brought in temporary commercial rent relief measures. This required landlords overseeing the premises of corona-impacted businesses with turnover of less than $50 million to temporarily reduce rent in line with losses incurred.

But for SMSFs, deferring rental payments for such premises are typically viewed by the regulator as preferential treatment and a breach of the Superannuation Industry Supervision Act.

In response to concerns raised by the SMSF Association and other lobby groups, the tax office has said it won't impose penalties for such breaches, and doesn't require such instances to be reported. Maroney says this will likely be allowed to continue for as long as the banks offer relief.

 a

is senior editor for Morningstar Australia

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