Call to tighten rules on SMSF distracts from the real problem
The increasing popularity of self-managed super funds is undeniable. From about 70,000 SMSFs in 1994, the number has increased to just short of 510,000 by June 30, 2013. Of the $1.58 trillion invested through Australian super funds, SMSFs control $496.2 billion, making it the largest sector of the superannuation industry.
The success of the SMSF sector is producing real fear in industry and commercial sectors of the superannuation industry. Evidence of this is a call for tighter regulation of SMSFs, based on the wild claim in a recent article that up to $50 billion in superannuation assets were at risk because SMSF trustees were breaching super regulations.
One small statistic in a speech by Stuart Forsyth, the Australian Taxation Office's assistant deputy commissioner for superannuation, was used to estimate how much superannuation is at risk.
Forsyth was speaking at an SMSF conference and detailed the findings of an ATO statistical overview of SMSFs. A study of the statistics in this report produces a very different picture to the one painted in the article.
The report lists 21 breaches of the superannuation regulations that auditors must advise the ATO of in auditor contravention reports. The seriousness of the offences ranges from minor, such as not keeping minutes and records, up to more serious breaches that include purchasing assets from members.
When an SMSF is in its first 15 months of operation, auditors must report every contravention with a value of more than $2000, no matter how minor.
For older SMSF funds, auditors need only report on contraventions that are greater than 5 per cent of the value of the fund's total assets. Despite the requirement to report all contraventions in the first year, only 2 per cent of SMSFs each year have auditor contravention reports lodged relating to them.
The types of contraventions reported over a seven-year period finishing June 30, 2012, also puts into perspective the nature of the contraventions. The most serious, which was also the most common of the breaches, was the provision of financial assistance or loans to members. This made up 20.9 per cent of all contraventions reported.
By contrast, breaches of a relatively minor nature, such as administrative contraventions, not separating assets owned by the SMSF from those of members and operating standard contraventions, made up 33 per cent.
Another point to consider when assessing the risk to superannuation as a result of these contraventions is that in many cases, by the time the auditor reports the contravention to the ATO, it has already been fixed.
Rather than looking at subjecting the SMSF sector to tighter regulation, due to the possible loss of superannuation assets from potential breaches of the regulations by SMSF trustees, the government needs to look more closely at its proposed weakening of the Future of Financial Advice regulations.
According to the Australian Prudential Regulation Authority, the value of retail funds has grown from $207.4 billion in 2004 to $422.4 billion in 2013. These are the super funds that pay ingoing and trailing commissions to advisers, ranging from as low as 0.3 per cent to more than 1 per cent, and often have higher administration fees.
Taking an average combined cost of higher administration fees and trailing commissions of 0.5 per cent, and applying this to the value of retail funds over the nine years to June 30, 2013, the cost to members in retail super funds has been more than $16 billion.