Answer To: SUBJECT CODE & NAME: FIN203 Banking & Finance Section Comments/Notes 3. Assessment Details:...
Ayush answered on May 09 2021
Self-managed Superannuation Fund
King' Own Institute
Self-managed Superannuation Fund
A research report
Bandana Shrestha [Pick the date]
Executive Summary
Australia has an “aging population”. So, people save their money funds called superannuation funds. These funds can be divided into 2 kinds: Self-managed Super fund (SMSF) and APRA-regulated funds. Our main focus will be SMSF. In 2018, the total number of SMSF was 99.7% of all super funds, accounting for $747 billion of total assets.
SMSF follows 2 types of structure: Individual and Corporate Trustee. Both have relative advantages and disadvantages. SMSFs, in general, required time and skills. Plus, it has a whole lot of risks. But it also has certain pros like freedom to invest, flexibility and control. SMSF has tough regulations and multiple costs.
SMSFs give lesser returns as compared APRA-regulated funds. The main reason for this is lack of diversification. While APRA-regulated funds invest globally, SMSFs suffer from home bias at home. Plus, Fund sizes matter as the bigger the fund, the greater is return. SMSF members are overconfident about their SMSF knowledge and financial literacy. Also, financial professionals don’t pay enough attention.
To tackle these problems, 4 measures are suggested. These are: compulsory training for SMSF members, special training for financial professionals and checks & balances for them, incentivization for SMSFs to encourage global investment, and minimum balance for setting up an SMSF.
Table of Contents Page
Introduction 4
Research & Analysis
SMSF – Structure, Management, and Regulation 4
SMSF versus Other Funds 6
Returns of SMSFs and Other Funds 13
Recommendations 15
Conclusion 16
References 17
Appendix 19
1. Introduction
According to the Australian Bureau of Statistics’ (ABS) data, the median age of Australia’s population grew 2 years over the last two decades, that is, 35 years in 1999 to 37 years in 2019.( Australian Demographic Statistics, Jun 2019) With our High Life Expectancy and Low Fertility Rate, our population is “Aging”. The number and proportion of older people is rising. To give you a trend, there were 1.3 Million (9% of population) people aged above 65 in 1977. By 2017, this number was 3.8 million (15% of population). It is estimated that by 2057, this number will be 8.8 million (22% of population). (Older Australia at a glance, 2018)
There was a need to fund expenses of elderly people. Although, the system of superannuation was there before from early 1900s, but only, 40% of population received the benefits. The real system was implemented 1991, when the Superannuation Guarantee (SG) was introduced which made it a compulsory system to superannuation support for Australian employees, paid for by employers. And since then, numerous reforms and amends have taken place. (A brief history of superannuation in Australia, 2015)
There is variety of superannuation funds. Major types are Corporate, Industry, Public sector, Retail, and Self-managed superannuation funds (SMSFs). Our focus will be on SMSFs. (moneysmart.gov.au, n.d.)
2. Research & Analysis
2.1 Self managed superannuation funds (SMSFs) – Structure, Management, and Regulation
Self managed superannuation funds (SMSFs) or DIY funds are private super fund that you manage yourself. Initially, retirement savings were managed and invested in retail funds, industry funds and corporate funds. (Raftery A., 2014 Pg 11) In 1999, due to some legislative changes, the people had the opportunity to manage their own retirement savings. Since then it has grown and occupied the fraction of superannuation funds. As per Australian Taxation Office, the total assets held by SMSFs have grown to $ 750 billion in 2019 from $55 billion in 1999. That’s about one-third of Australia’s total $2.76 trillion retirement system. (Australian Taxation Office (ATO), Oct 2019)
SMSF can follow 2 types of structure:
1. Individual Trustee
An Individual trustee has 2 to 4 members. “Each member of the fund must be trustee, and each trustee must be a member of the fund. One of the two member (or more) must be a fund member.” (ATO, Feb 2018) Fund asset must be in name of the funds and no asset must be combined with member’s personal asset. The setup fee is $350. As Australian Securities and Investments Commission (ASIC) fees are not applicable, an individual trustee structure is usually less expensive. (Quiet Growth, Types of SMSF structure, n.d.)
2. Corporate Trustee
A Corporate Trustee can have 1 to 4 members. “Each member of the fund must be a director of the corporate trustee (that is, the company), and each director of the corporate trustee must be a member of the fund. The corporate trustee can have one or two directors, but no more than that.” (ATO, Feb 2018) The fund member must be the sole director or one of the two directors. The fund assets rules are the same as individual trustee structure. An Australian Securities and Investments Commission (ASIC) fee is applicable during setup as well as annual review. Thus, setup cost is approximately $1000. However, fees can vary depending on whether you run the corporate trust as solely as a super trustee (in which case, fee is lower) or along with business (fees is higher). (Quiet Growth, Types of SMSF structure, n.d.)
As of Jun 2017, 57% had corporate trustee structure. Both structures entail heavy penalties on breach of Super and Tax Laws. (Self-managed superannuation funds: A statistical overview 2015-2016, Jan 2018) The only difference is that in case of Individual trustee, each member is charge with penalties whereas in case of corporate trustee, the penalty is levied on corporate trustee (the company) and members can split the penalty amount. Also, in case of corporate structure, if any change of member due to death or incapacity, the control of the SMSF and its assets are more certain than individual structure as generally, the individual structure is run by Husband-Wife as members and any break-down of relationship results in “unlikely to operate as usual unless an appropriate succession plan is prepared” (ATO, Feb 2018). The borrowing power is also higher of corporate structure as their Loan to Value ratio (LVR) is higher as compared to individual structure. As a result, banks give less preference to individual trustee. (Quiet Growth, Types of SMSF structure, n.d.)
Managing an SMSF takes time and work. SMSF trustees spend more than 100 hours to manage activities. (SMSF Investor report, Investment trends, 2018) Activities such a researching investment, setting and stick to an investment strategy, accounting and schedule audits each year by certified SMSF auditor. It also involves paying for numerous services such as financial advice, legal, actuary, accounting, and tax advice. Besides that, one is personally liable for all fund related decision. Remember that one investment may not yield any returns nor you can seek remedy in case of theft or fraud or Superannuation Complaints Tribunal. In 2016, the average cost of running an SMSF was $13,700 per year. (Self-managed superannuation funds: A statistical overview 2015-2016, Jan 2018) But, having said that, many SMSF members say that financial planner or accountant originally suggested the idea of starting SMSF. Control over investment and tax minimization is the most common reasons cited for starting SMSF. (Ron B., Doug F., Sep 2016)
SMSF audit play significant role in ensuring regulation are met. In 2016, 5800 SMSF auditors governed, on average, 74 audits. The median audit fee remains to be $550 and is constant since 2013. SMSF auditors must submit Auditor Contravention Reports (ACRs) in order to report any breaches. 7600 SMSFs had filed 14800 ACRs contraventions. The number of SMSFs with ACRs every year remains to be relatively stable with 2% of all the SMSFs each year. (Self-managed superannuation funds: A statistical overview 2015-2016, Jan 2018)
2.2 SMSF versus Other funds
Given below are some graphs that show how the trend is changing with regard to SMSFs.
Fig 1: Number of SMSFs as % of Super Funds [Appendix - Table 1]
Fig 2: Total Assets over the Year [Appendix - Table 2]
Fig 3: Total Asset in SMSF as % of Super Funds [Appendix - Table 3]
From Fig 1, we observe that over the years, the proportion is stable and rising at basis points. Also, from Fig 3, we can see it has reduced by a couple of percentage points from 30.4% in 2016 to 27.5% in 2018.
Fig 4: Average size of super funds including SMSF vis-à-vis Average size of SMSF [Appendix - Table 3]
Fig 5: Avg. SMSF as % of Avg. super fund [Appendix - Table 5]
Next, we compared Average size of super funds including SMSF vis-à-vis Average size of SMSF and Average SMSF as % of Average super fund (including SMSF). We find the same trend as in case of Total Assets.
Fig 6: Number of Other Super fund (Excluding SMSFs) [Appendix - Table 6]
Fig 7: Other funds assets (Excluding SMSFs) ($ Bn) [Appendix - Table 7]
Fig 8: Avg. Other fund size (Excluding SMSFs) ($ Mn) [Appendix - Table 8]
From Fig 6, we observe that they has been a constant decline in number of other funds from 6843 funds in 2007 to 2019 funds in 2018, while total assets in these funds are rising (Fig 7). As a result, the Average Fund size has been increasing from $ 126 million in 2007 to $ 975 million in 2018. One reason could increase number consolidation of funds.
Fig 9: SMSFs Diversification of asset class in 2015-2018 [Appendix - Table 9]
Fig 10: Change in SMSF’s asset allocation by asset type from 2012-2016
Source: (Self-managed superannuation funds: A statistical overview 2015-2016, Jan 2018)
As can be seen, SMSF invests in Australian Listed shares and Cash and term deposits (2015-2018). Although, there has been a shift from 54% in the 2 assets classes in 2015 to 49% in 2018. Fig 10 shows annual shift in SMSF’s assets allocation by asset type as a percentage of total assets from 2012-2016. From 2 figures, we can deduce that Cash and Term deposits and non-residential real property has seen a constant decrease for consecutive 6 years. Also, in the period of 2012-2014, there was increase in proportion of listed shares which came down and begin to decrease in 2015-2018. Limited recourse borrowing arrangements (LBRAs) also saw a rise in asset allocation in 6 years, taking value to $43.9 billion (6% of total SMSF assets) in 2016 from $2.5 billion (0.6% of total SMSF assets) in 2012. But other asset classes saw bare change i.e. Insurance policy, Oversea Assets, Unlisted Shares, Debt Securities etc.
Fig 11: Allocation of Equities, 2018
Source: (Mason, Somerville, Dynamics of the Australian Superannuation System, Deloitte, Nov 2019)
Fig 11 gives a sense of the SMSFs fare vis-à-vis other super funds i.e. Corporate, Industry, Public,...