Time to batten down hatches as nest-egg regulators swoop
Those attacking SMSFs include the Reserve Bank, the Australian Securities and Investments Commission, the Australian Prudential Regulation Authority, and Senator Arthur Sinodinos, the new minister for superannuation.
Leading the charge is ASIC with the release in mid-September of a report it commissioned into the cost of operating SMSFs.
This report is the second released by ASIC as a part of its investigation into the quality of advice received by the SMSF sector.
The first report, released in April, alleged that advice provided to SMSFs was not up to a standard that ASIC would like. Of 100 SMSF advice files reviewed, 28 per cent were found to be poor.
On the basis of other reviews conducted by ASIC into the quality of general financial advice, SMSF trustees do better than the general public. In ASIC's 2012 shadow shop, where the quality of financial advice is assessed, 39 per cent of the general financial advice given was poor.
The second report, into the cost of setting up and running an SMSF, was based on a study conducted by actuarial firm Rice Warner. This research shows that SMSFs with less than $100,000 in assets were more costly than industry and commercial super funds. SMSFs with $100,000 to $200,000 were only competitive when compared to the more expensive commercial super funds.
What the research pointedly did not reveal was that the yearly administration costs for an SMSF, when the members are in pension phase, can often be less than most commercial super funds and also some industry funds.
The finding of the first report, that caused the most concern for ASIC, was the advice provided to investors to set up an SMSF to gear into real estate. This has been followed by the Reserve Bank stating that it feared the property market would overheat due to the ability of SMSFs to borrow to invest in property. Allegedly over the past six years there has been a large increase in geared property by SMSFs.
Senator Sinodinos joined the attack when he raised the possibility of a change to the SMSF borrowing rules because he regarded SMSFs as having an unfair advantage over other funds.
Given his comments, after barely being in the job for a week, it is not surprising that Senator Sinodinos' ministerial appointment was so loudly welcomed by the superannuation sector most challenged by SMSFs.
As is usually the case, rather than being influenced by emotion and prejudice, when a study of the facts is made, a very different picture emerges about this so-called flood of investment into geared property by SMSFs.
Graeme Colley, director of technical and professional standards with the Self Managed Super Fund Professionals Association of Australia, pointed out that of the $495 billion invested by SMSFs, only 3.4 per cent was invested in residential property.
He further said: "In addition, gearing is not the issue its critics allege. According to ATO statistics, geared property in SMSFs makes up less than one half of 1 per cent of their total investments."
Rather than blaming the SMSF sector for possible price bubbles in real estate, the government and regulators should be concentrating on the sectors that are causing the problem, property developers, commission-driven advisers, and finance companies funding the property purchases.
Frequently Asked Questions about this Article…
Regulators have raised concerns that some SMSFs may have an unfair advantage over other super funds, that advice to set up SMSFs can be poor, and that SMSF borrowing to buy property could contribute to real‑estate overheating. ASIC has published reports into SMSF advice quality and costs, while the Reserve Bank flagged risks from increased gearing in property.
According to actuarial research cited by ASIC, SMSFs with less than $100,000 in assets tend to be more costly than industry and commercial funds. SMSFs with $100,000–$200,000 are only competitive against the more expensive commercial funds. The research also notes administration costs can be lower when members are in pension phase.
ASIC’s review found that 28% of 100 SMSF advice files were judged poor. For comparison, a 2012 ASIC shadow shop into general financial advice found about 39% of general advice was poor, so SMSF advice performed better than the broader sample but still showed significant failings.
Regulators including the RBA have expressed concern that SMSF borrowing could add pressure to the property market. However, industry data cited in the article shows SMSFs hold $495 billion in assets with only 3.4% invested in residential property, and ATO figures quoted by industry representatives indicate geared property in SMSFs is less than 0.5% of their total investments—suggesting SMSFs are a small part of the picture.
The article notes that Senator Arthur Sinodinos raised the possibility of changing SMSF borrowing rules, arguing SMSFs might have an unfair advantage. That comment prompted discussion, but the article does not report any confirmed legislative changes—only that the idea was raised by the minister.
The article suggests regulators and government should concentrate on sectors more directly linked to property market problems: property developers, commission‑driven advisers, and finance companies that fund property purchases, rather than blaming SMSFs as the primary cause.
Based on the article, investors should consider whether the SMSF’s administration costs are sensible for their asset level (SMSFs under $100k are often more costly), the quality of financial advice they receive (ASIC found a notable share of poor advice), and the risks of gearing into property given regulator concerns about borrowing.
The article cites $495 billion invested by SMSFs in total, and says only 3.4% of that amount is invested in residential property, according to figures referenced by SMSF industry representatives.
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