(03) 9020 2905PORTFOLIO POINT: Why did SMSF super contributions plummet in FY2010? Plus Labor exercises good sense in ignoring Cooper’s arts ban recommendation.
Okay, hands up if you increased contributions to your super fund in FY2010, compared to FY2009. Not too many.
According to the results of a new survey, super contributions slumped by 22% in the 2009-10 financial year. But that’s 22% in actual dollar terms – given the rising nature of wages, the real fall is considerably higher.
Why? It was a year in which market returns were great (well, comparative to the disasters of the previous two years), and when Australia’s economy was moving in the opposite direction to the rest of the world. We had low unemployment, reasonable inflation, rising property prices and general consumer optimism.
But SMSF members aren’t contributing to super. A survey by SMSF administration provider, Multiport, has shown the average contributions dropped from an average of $43,800 to $34,200 among its 1200 clients.
That is, for every $5 that was put in during FY2009, less than $4 was put in during FY2010. It’s just short of devastating.
But it’s actually worse than that. A reasonable comparison should be this … average weekly earnings (according to the Australian Bureau of Statistics) rose 5.9% in the year to February 2010. So if you were a regular employee, having only your Superannuation Guarantee contributions made to your super fund, the average contribution should have risen roughly 5.9%.
Instead (assuming Multiport’s SMSF client base isn’t too dissimilar to the average SMSF) they’ve fallen 22%. In relative terms, they’ve gone backwards around 28%.
If you personally didn’t contribute as much as you did the previous year, I’d like to hear from you (my email address is at the end of this column). Was it a tough year for personal finances? A tough year for profits in the small/medium business sector? Just exercising a little caution? Chose instead to retire some debt? A bit gun-shy, given the market returns of the two previous years?
Or … was it political/legal? A result of Labor’s cuts to the contributions limits? Out of fear of government responses to Cooper or Henry?
SMSF member-trustees tend to have a lot more flexibility as to whether they contribute to super or not. Small or family businesses can decide to make, or not make, contributions, according to profitability, or whether they want to pay themselves a salary or trust distributions.
But given that a large number of trustees also have “regular jobs” and may well have got the 5.9% average national pay rise, the discretionary element of what was paid into super looks like it was probably a shattering fall.
And it’s not like FY2009 was like comparing a year to FY2007, when there was that one-off opportunity to dump $1 million of non-concessional contributions into super.
The major difference between FY2009 and FY2010 was the Rudd Government’s reduction in the concessional contribution limits. The $100,000 limit for the over 50s was cut to $50,000. And the $50,000 for everyone else was cut to $25,000.
Multiport’s chief executive John McIlroy said the fall in contributions was roughly equal between concessional and non-concessional. In the average year, about 40% of contributions are concessional and 60% are non-concessional. There was little difference in 2010 to previous years, Mr McIlroy said.
We just don’t have a definitive answer as to why there was such a significant slump. If it was because of the cuts to contribution levels, then the government’s aim to hit “wealthy” SMSF members was certainly achieved. Will people remember these cuts with an election coming up? Or is it a case of “don’t care, they won’t be voting for us anyway”.
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There were some other interesting statistics to come out of Multiport’s survey, including when SMSF members make their contributions.
About 34% of contributions are made in the final quarter. It’s certainly higher than the 25% that it would be if contributions were made evenly through the year. But I actually thought it might have been a little bit higher, given that small business often leaves it to June to put away any super for the year. McIlroy said that there has been a shift to putting money into super more consistently throughout the year.
During 2009, there was a bit shift out of cash and back into equities. Cash holdings of Multiport’s clients fell from 28.8% at the end of 2009 to 21% at the end of 2010. It has moved to 21.4% at June 30, 2010.
Over the same periods, Australian shares lifted from 31.9% to 42.6% at the end of 2009 and then fell to 40% at June 30, 2010. This is despite the awful quarter for Australian shares that the June quarter was.
In the Australian shares space, the split between directly held shares and the use of managed funds changed. At the end of 2008, 70.8% of the Australian equities portion of portfolios was held directly. At the end of 2009, that had risen to 84.5%, with a corresponding fall in the use of managed funds to manage the Australian shares portfolio.
At the end of FY2010, that had fallen marginally to 82.8%.
And, drumroll please … not that there’s terribly much surprise here … the top ten holdings of direct shares by value were:
- BHP Billiton
- Commonwealth Bank
- Westpac
- ANZ
- National Australia Bank
- Wesfarmers
- Woodside Petroleum
- Woolworths
- Rio Tinto
- Telstra
My only surprise was, I guess, Telstra. I would have thought Telstra’s fat dividends would have lured more people in.
Direct property is a favourite of SMSFs when it comes to investing in that sector, according to Multiport. Of the 17% of funds that were held in property assets, 12.2% was in direct property, while just 4.8% was in REITs, managed funds and syndicates.
Interestingly, Multiport’s survey of its clients showed that just 0.5% of assets, by value, were invested in exotic assets, which leads us to …
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When it comes to the Cooper’s Super System Review, it’s a case of one down (a few more to go, in my opinion).
Labor has decided to ignore the recommendation from Cooper’s super review to ban the holding of “exotic” assets. SMSFs will be able to continue to hold and invest new money in exotics, which include artwork, collectables, coins, cars, yachts, etc.
But Labor is going to tighten and strengthen the laws. Labor has said that there are currently no enforceable guidelines about how these assets are held (that is, in the home when SMSF members are gaining an immediate benefit, rather than it providing benefits for retirement purposes only).
Cooper had recommended an immediate ban on exotic investments inside SMSFs. Further, those who had them would have five years to get rid of them. Lastly, if you wanted to keep them, you’d have to switch to becoming a small APRA fund.
The tightening of the laws will be to more closely reflect what’s been recently argued by the Self Managed Superannuation Funds Professional Association of Australia (SPAA) for the housing of exotic assets. That is, not in the home of a member or an associate.
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If you would care to send me an email about why you might have reduced your contributions to your SMSF this year, please address it to: bruce@castellanfc.com.au .
Bruce Brammall is director of Castellan Financial Consulting and author of Debt Man Walking.