SMSFs: Self-interest the key in assault on DIY super funds

The Australian

16 September 2017

James Kirby

Fresh efforts to undermine and stop the spread of DIY superannuation funds are reaching a crescendo: emboldened by the tax crackdown on the system this year, industry lobbyists are now openly attacking the sector with a venom they might have concealed under more supportive governments.

And the alarming part of it all is that while the enemies of SMSFs are substantially crossing all party lines, the supporters of the SMSF brigade are few and far between.

If you want to see the enemies of DIY super in action the Australian Institute of Superannuation Trustees has delivered a manifesto on the issue in the shape of a submission to the Productivity Commission’s superannuation review. It succinctly captures every prejudiced line you will hear super funds at the big end of town (and this includes union-backed industry super funds) take against SMSFs.

You may have thought something called the AIST would be out there earnestly advocating for all trustees of super funds. But it turns out this organisation thinks even now — after a torrent of new legalisation — that SMSFs are incompetent managers of their own money, a baleful influence on the housing market and to top it off they are trying to minimise tax (a grievous sin, apparently.)

The government has got to stamp it all out, says the AIST: “Government policies which facilitate the offer of an unrestricted number of investment options, and which place minimal barriers for the creation of SMSFs, generate material inefficiencies within the superannuation system.”

What a load of twaddle.

There is no need to pick apart this argument because it is such obvious nonsense — the majority of SMSFs have done perfectly well over a long period of time with a relatively narrow asset allocation.

SMSFs are well able to respond to market changes — recent work from Credit Suisse has noted their shift into the market in search of dividend yields as cash rates have dwindled (see graph).

They do not create “inefficiencies in the system” unless the AIST means lost opportunity for big fund trustees to collect more business, and as for “minimal barriers” to the creation of SMSFs, this organisation must have missed the new regulations coming down the line from the ATO in relation to super funds.

Perhaps the most virulent lobbying against SMSFs comes on the property front. Arguments against SMSFs being allowed to borrow for property have been well canvassed — most powerfully by David Murray’s Financial Services Inquiry.

Yet the government reviewed this issue and left it alone. Beyond that it goes without saying that if SMSFs can buy geared share funds, long-short funds and all manner of hedge funds, then why on earth can they not borrow to buy the house around the corner? This is a transaction they will understand a lot easier than the mechanics of  a hedge fund.

What is most fascinating about the AIST submission is the absence of even a pretension of fair treatment — there is so little attempt to look at the bigger picture it is alarming.

We know big funds act against SMSFs at every turn. I came across this first-hand over a decade serving on the advisory board of a medium-sized super fund when the boardroom conversation regularly turned to the need to stop members leaving to start up their own DIY funds.

But now we have an SMSF sector which is amassing real power — John Maloney, the chief executive of the SMSF Association (which represents professionals serving DIY members as opposed to the members themselves), recently told a tax conference the population of DIY fund members will move towards two million in the decade ahead. But you have to wonder if this healthy flourishing of a self-reliant super fund sector will actually now come to pass — the introduction of this year’s substantial clampdown to DIY super rules may just be the thin end of the wedge.

Over the first few months of the new super tax regime we are simply digesting the changes but among professionals a realisation is dawning that the administration of these changes is going to seriously change the nature of every SMSF. Specifically the gradual introduction of new “SMSF event-based reporting” around the policing of new $1.6 million balance caps may be a sign of things to come.

No doubt as the years go by the ATO will continue to get more and more new ideas about the requirements from SMSFs and they will have organisations such as the AIST to back them up every step of the way.