Time to batten down hatches as nest-egg regulators swoop

SMSF trustees are under attack. They have been accused of having an unfair advantage over other super funds, blamed for a price bubble in real estate, and told that they probably shouldn't have an SMSF because they are too costly to administer.

SMSF trustees are under attack. They have been accused of having an unfair advantage over other super funds, blamed for a price bubble in real estate, and told that they probably shouldn't have an SMSF because they are too costly to administer.

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.

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