(03) 9020 2905PORTFOLIO POINT: Tighter legislation of our now 400,000-plus DIY funds is on the way. Just don’t expect it to be rushed. However, minimum balance requirements are off the agenda.
That DIY super hasn’t had the “new government treatment” so far does not mean that Superannuation Minister Senator Nick Sherry isn’t ready to pounce and rewrite a few rules that could affect all trustees.
As the number of self managed super funds topped 400,000 for the first time in December, Sherry has confirmed that he’s working on a hit list. But, despite the pushing and needling of his Shadow, Chris Pearce, he’s not going to rush it
Sherry recently highlighted (at the Self Managed Superannuation Professionals Association of Australia conference in Adelaide) issues that he had with the use of debt-based investment within superannuation. This was probably his strongest uttering to date that he may be prepared to rewrite some or all of the September 2007 tax changes that allowed SMSFs to gear more broadly into super to buy assets.
Education continues to be a major concern for the minister. He is worried that trustees do not fully understand the risks involved with gearing and is further concerned that some trustees have taken the new rules one step too far with one particular investment product.
“I … remain very concerned at system-safety level about the use of debt instruments in SMSFs. In addition, we now see such products as ‘contracts for difference’, or CFDs, making an appearance. I am genuinely concerned about the role of such products,” he said.
“This issue is directly linked to the other key reform considerations – trustee education and knowledge – do trustees understand the risks?”
Sherry said he was not going to feel pressured to complete the now 13-month-old review into super. It certainly hasn’t been rushed. And a good thing too, he believes, as any changes made in the first half of last year could have been both confusing and caused unintended consequences as markets went into meltdown last year.
“As Minister, I may not be out making public mileage with these issues, but I can assure you that the work proceeds. This Government will get this work right and we’ll do it in an appropriate, rather than expedient, timeframe.”
That is, there’s no rush, folks.
Sherry said that the Australian Tax Office’s role as the compliance officer for SMSFs was also under review. The ATO checks compliance with survey samples of about 2-3% of the industry, which means only about 10,000 funds are looked at during the review process.
Sherry is also focused on costs. He seems to be of the opinion that there is some fat in the system that could be trimmed. His concerns are not limited to SMSFs. They take in government, corporate, retail and industry funds.
However, Sherry all but denied the government was looking to introduce a minimum for people starting up SMSFs, which we have canvassed in this column before. “While I am not proposing to get bogged down in a backwards and forwards debate on this issue, I can say that the Government has no such position,” Sherry said.
The concern comes as people continue to flock into SMSFs as an investment vehicle. The ATO’s figures show that the number of individual funds topped the 400,000 mark for the first time in the December quarter.
More than 5500 funds were opened in the December quarter, taking the total to 401,366. The number of members of those funds is now more than 773,000.
Further, ATO commissioner Michael D’Ascenzo said that there had been a 19% spike in the number of SMSFs set up between September and the end of January, when compared to the previous year.
The ATO’s breakdown of investments within SMSFs shows a continuing fall in the overall value of the assets held. Despite the falls in investment markets in the financial year to June 2008, inflows and contributions managed to keep the overall assets in SMSFs increasing. However, this couldn’t withstand the crunch in the second half of last year.
In June 2007, SMSFs held total assets of more than $330 billion. By June 30, 2008, this had risen to $352 billion. However, the September 2008 quarter saw this fall to $342 billion and by the end of 2008, the total had dropped to just $326 billion.
The major fall was, of course, in listed equities. In the 18 months between June 2007 and December 2008, the total invested in listed equities fell from $113.8 billion to just less than $82 billion. This represented a fall of 28%, suggesting that though stock markets were falling (by about 45% over that period), trustees were still buying.
Also to be expected, cash on hand grew. Over the same 18-month period, the cash balances of funds grew 22.4% to $101.95 billion. But there was a slowdown after June 2008, as the Reserve Bank started to cut interest rates.
One of Sherry’s concerns – over the small amount of assets in some SMSFs – seems to be becoming less of an issue as time progresses. The percentage of funds with less than $500,000 has been consistently falling over the 2004 to 2007 financial years. Those in higher asset class groups ($500,000-plus) have all grown considerably over the same period (see table).
Table: Percentage of SMSFs as part of whole market
| Asset Ranges | 2003–04 | 2004–05 | 2005–06 | 2006–07 |
| $0-$50,000 | 14.81% | 12.43% | 10.48% | 7.99% |
| >$50,000-$100,000 | 10.63% | 9.43% | 8.00% | 5.83% |
| >$100,000-$200,000 | 16.75% | 15.52% | 14.01% | 10.95% |
| >$200,000-$500,000 | 28.30% | 27.94% | 27.26% | 24.07% |
| >$500,000-$1m | 17.77% | 19.54% | 20.98% | 22.19% |
| >$1m-$2m | 8.60% | 10.71% | 13.01% | 17.45% |
| >$2m-$5m | 2.80% | 3.89% | 5.38% | 9.65% |
| >$5m-$10m | 0.28% | 0.45% | 0.69% | 1.55% |
| >$10m | 0.07% | 0.10% | 0.17% | 0.32 |
| Total | 100.0% | 100.0% | 100.0% | 100.0% |
Figures from ATO
Similarly, the average assets of each member and each fund has grown extraordinarily between those two periods.
Table: Size in dollars by member and fund
| 2003–04 | 2004–05 | 2005–06 | 2006–07 | |
| Average assets per member | 245,610 | 291,480 | 349,369 | 489,247 |
| Average assets per SMSF | 474,105 | $562,297 | 672,769 | 938,315 |
Figures from ATO
Trustees are probably quite glad that Sherry hasn’t done anything too radical to super in his time in charge. But we may not get to see that continue for too long. Let’s hope that when he does get around to “renovating the house” (his term for what he’s doing), that the end product is still largely recogniseable to we’ve got today.
Bruce Brammall is the principal financial adviser with Castellan Financial Consulting and author of Debt Man Walking.