SMSF’s tax arrangements in retirement savings review

Australian Financial Review

Aug 3 2016 at 6:27 PM Updated Aug 3 2016 at 6:27 PM

by Joanna Mather

Tax arrangements for the million Australians who have self-managed superannuation funds will form part of a sweeping review of the $2 trillion retirement savings system.

In an attempt to guarantee value for money and prevent gouging, the government has asked the Productivity Commission to come up with ways to assess the efficiency and competitiveness of the super system.

In a report released this week, the commission said there was a belief in some quarters that operational efficiency of SMSFs should not form part of the exercise because they are so different to retail, industry and corporate funds.

But the commission decided SMSFs would be included wherever possible. In fact, consideration would be given to whether SMSFs face any unique barriers to accessing particular investment markets due to, for example, a lack of scale.

“Similarly, the commission will also look at how taxation is managed in SMSFs compared with institutional funds, and what implications this has for member balances,” a draft report said.

There were more than 550,000 SMSFs with about $590 billion in assets as at June 2015.

The commission noted that investment performance by SMSFs tended to be below other funds and they are also more expensive to run.

It said Australian Taxation Office figures suggested the estimated average operating expense ratio, as measured by operating expenses as a proportion of assets, for SMSFs was 1.06 per cent.

“ATO data indicate that smaller SMSFs have higher average operating expense ratios than larger ones.

“For example, over the 2010-14 period, the average operating expense ratio was in the range of four to 12 per cent for SMSFs with less than $100,000 compared with less than 1 per cent for SMSFs with over $1 million.”

Past studies have examined the impact of SMSF scale on their cost competitiveness, the commission said.

For example, a report commissioned by ASIC found that SMSFs with balances of $200,000 or more were likely to be cost competitive with APRA-regulated funds provided trustees undertook some or all of the administration themselves.

And balances over $500,000 could provide equivalent value for money on a full-service basis where administration has been outsourced.

The ASIC report also found SMSFs potentially become less cost competitive in the retirement phase, as member’s draw down on their balances.

“Participants to this study and previous inquiries, such as the Financial System Inquiry, emphasise that costs and fees are only part of the story: some people want the flexibility to pick their own investment options, some start with small funds but expect to expand them with asset transfers in the future, and some keep their costs to a minimum by doing much of the administrative work themselves,” the commission said.