Every 3 months, Class publishes an SMSF benchmark report, showing trends in the industry and including a quarterly feature on a particular issue. The Class SMSF Benchmark Report June 2018 looked at the effects of the super reforms on pension accounts and other topics.
Class SMSF Benchmark Report June 2018
Two years after the 2016 budget announcement, the SMSF industry operates in a vastly different way. The reforms changed the processing of funds. It prompted the shift of assets from pension to accumulation phase. And it changed SMSF reporting requirements and how actuarial certificates are managed.
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Policy outcome achieved
The $1.6m transfer balance cap and changes to TRIS saw almost 25% of SMSF assets lose their tax-free status.
As at June 2018, Class data showed asset values in accumulation phase hit $422 billion. This is a 90% increase from March 2017 when asset values in accumulation were $222 billion. The tax implications are huge.
Great pension squeeze
The 2016 super reform changes caused a tectonic shift in asset allocation.
Pension assets are under a lot of pressure. The dual forces of the TRIS change and the $1.6m transfer balance cap forced assets into accumulation and mixed phases.
In March 2017, 31% of assets were held in pension phase and 45% were held in mixed phase. As at June 2018, only 14% of assets remain in tax free pension phase, while mixed phase has jumped to 57%.
Unexpected results
There is an increase in contribution splitting and recontributions. This has led to a significant improvement in the gender imbalance in SMSF assets and balances.
The rising SMSF tax bill
If we assume a modest return of 5% on assets for the 2018 financial year, we would see an uplift in the tax due on SMSF earnings to $3.2 billion. This is a whopping $1.5 billion jump from 2017.
Class tax estimates are based on earnings only. The tax outcome of a fund also needs to take into account contribution tax, deductible expenses and rebates including franking credits.
Pension SMSFs already struggling
Given the impact of the 2016 super reforms, Class doesn’t consider the proposed Labor policy to further increase the tax burden on self-funded retirees by reducing imputation credits for SMSFs is appropriate, especially if it disproportionately impacts SMSFs compared to APRA funds.
If the proposed changes go through, SMSFs will not only be subject to 15% income tax on a higher portion of their assets (now in accumulation), but they may also lose their tax credits on their pension and accumulation assets.
Class SMSF Benchmark Data – 30 June 2018
The SMSF Benchmark Report is compiled using de-identified data from across the Class user base. Class believes it is important for its customers and other participants in the industry to have acess to timely benchmark data and key metrics about their industry, their peers and the SMSFs they service.
Much of the data available from other sources is estimated, based on small non-representative samples or is collated many months after the fact.
Here are some key statistics from the Report.
a) SMSF Administrators
The 1,363 businesses (accountants, administrators and financial planners) using Class administer a total of 163,464 SMSFs. The median number per SMSF administrator is 58 SMSFs.
While small firms – less than 25 SMSFs – are still a significant subscriber category on Class, a typical small SMSF practice for Class has between 25-100 funds. The SMSF industry is consolidating, and Class expects that percentage to decrease over time.
If you group the administrators on Class by the number of SMSFs they manage, they fall into three groups, as follows:
25% of administrators administer 100 funds or less (industry 31%)
44% of administrators administer 101 to 500 funds (Industry 37%)
31% of administrators administer 501 funds or more (Industry 18%)
b) SMSFs
The 163,464 SMSFs on Class have a total net asset value of $228bn. They have an average SMSF balance of $1.4m, an average member balance of $734,324 and an average number of 1.9 members per fund.
If you group the SMSFs on Class by total asset value into three groups, it looks like this:
15% of SMSF have a total asset value of less than or equal to $200,000
66% of SMSFS have a total asset value of more than $200,000 up to $2m
19% of SMSFs have a total asset value of more than $2m
There remains a big difference between the average balance of members in two member funds. The first member has almost double the assets of the second. However, that disparity is likely to reduce now that the super reforms have placed tighter restrictions around member contributions and balances. As a group,men currently have 34% more assets than women and their average balance is 22% higher.
c) Accumulation v Pension
Mixed phase SMSFs are not the largest SMSF member segment. But they hold significantly more in net assets per member than those in either accumulation or pension phase. While accumulation and pension funds hold average net assets of $435,000 and $659,000 per member respectively, mixed funds hold average net assets of $1,222,000 per member.
Mixed SMSFs make up 32% of SMSFs on Class. They include funds where all members are in pension phase but some of their fund assets are in accumulation. And they include funds with a mix of accumulation and pension members. Mixed funds may only have one member if that member has both accumulation and pension balances.
Accumulation SMSFs make up 51% of SMSFs on Class and are defined as those which only have accumulation members. Pensions SMSFs make up 17% and are purely pensions with no assets in accumulation.
The average age of members in accumulation, mixed and pension funds is 52 years, 65 and 72 years respectively.
d) Investments
SMSFS on Class invested 28% of their net assets in listed shares, 21% in cash and term deposits, 19% in unlisted trusts and 10% in commercial property. The remaining 23% was invested in residential property, listed trusts, LRBAs and other.
Pretty much all SMSFs (99%) hold cash and term deposits. More than half (65%) invested in direct Australian listed securities. And 60% invested in managed funds and/ or direct property.
Direct investment by SMSFs in domestic listed securities is highly concentrated in the largest 20 domestic shares, especially banks. Banks make up 46% of the top 20 investments holdings.
SMSFs are using managed funds to get much of their international asset exposure rather than investing directly. They use ETFs to get exposure to developed market equities and as a passive investment in Australian shares. Emerging markets and Australian listed property are also relatively popular.
International ETFs make up 55% of the Top 20 ETF Investment Holdings while domestic make up 45%.
Technology stocks are the most popular for SMSFs investing directly in international shares, with tech stocks making up 56% of the top 20 investment in international shares.
The next Class SMSF Benchmark Report for the quarter July to September 2018 will be out in October 2018.
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Disclaimer: Tax Talks does not provide financial or tax advice. This applies to these show notes as well as the actual podcast interview. All information on Tax Talks is provided for entertainment purposes only and might no longer be up to date or correct. You should seek professional accredited tax and financial advice when considering whether the information is suitable to your or your client’s circumstances.