Over half of ETF assets are held by SMSFs

More that half of all Exchange Traded Fund (ETF) assets are held by SMSFs, the latest Class SMSF Benchmark Report has revealed.

SMSF investment in ETFs has seen “exponential growth” according to the March 2018 Class SMSF Benchmark Report.

Over the last five years the percentage of SMSFs investing in ETFs has more than doubled – from 7.9% of SMSFs to 18.9%.

The percentage of SMSF assets in ETFs has more than tripled, from 0.8% to 2.5%, with the total dollars invested by SMSFs in ETFs growing from $4.2 billion to $19.6 billion.

One-third of investors in ETFs are SMSFs, but they hold over 50% of ETF assets – a proportion that has held relatively stable as the sector has grown over recent years.

“SMSFs tend to hold larger amounts than other investors with the average SMSF ETF investor holding approximately $170,000, compared to other ETF investors who hold an average of approximately $70,000,” says the Class report.

“The BetaShares/Investment Trends ETF Report noted that ETFs are increasingly popular with SMSFs and other investors, with the key drivers for investing being diversification, cost-effectiveness and access to overseas markets.”

“SMSFs mostly 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 account for 54% of the top 20 ETF holdings by SMSFs, according to Class. Four of the top five most widely held ETFs by SMSFs are global or US equities, with the other being Australian property.

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Bills to increase fees on SMSF auditors introduced to Parliament

The Government has introduced Bills to Parliament to implement a fee-for-service model for ASIC, which includes substantial increases in fees for SMSF auditors.

“No longer will Australian taxpayers have to subsidise any difference between the fee an entity pays and the actual costs incurred by ASIC, ensuring ASIC’s costs are borne by those that have created the need for it,” said Minister for Revenue and Financial Services, Kelly O’Dwyer.

“The industry funding model promotes equity, encourages greater regulatory compliance, and enhances ASIC’s transparency and accountability. These Bills will strengthen ASIC’s capabilities to ensure it is an effective regulator.”

Minister O’Dwyer said the ASIC Industry Funding Model will commence on 1 July 2018.

The Superannuation Auditor Registration Imposition Amendment (ASIC Fees) Bill 2018 would raise the cap on fees ASIC can charge SMSF auditors from $1,000 to $3,000. This is reduced from the draft Bill, which had the cap at $5,000.

The Superannuation Industry (Supervision) Amendment (ASIC Fees) Bill 2018 would allow for fees to be charged for applying for an SMSF auditor registration to be cancelled and for applying to conditions on a registration to be varied or revoked.

The actual level of fees will be set in regulations, but it appears that under the funding model several fees applicable to SMSF auditors will increase dramatically. Based on draft regulations released the Government plans to increase the fee to register as an SMSF auditor from $107 to $1,927. The fee to cancel a registration would go from nil to $899.

The level of the fees, and the fee for cancelling an SMSF registration, has been criticised by the accounting body CAANZ.

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Government plans amnesty for Super Guarantee underpayment

The Government has announced a twelve month amnesty for historical underpayment of Superannuation Guarantee.

The amnesty, which is meant to be a one-off, is included in a Bill put to Parliament – meaning the Bill would have to pass for the amnesty to apply.

“We are introducing this one-off amnesty to allow employers to wipe the slate clean and pay their workers what they’re owed. All Australians workers should be paid the entitlements they are owed,” said a statement by Minister for Revenue and Financial Services, Kelly O’Dwyer.

“The Bill incentivises employers to come forward and do the right thing by their employees by paying any unpaid superannuation in full.”

“Employers will not be off the hook – to use the amnesty they must pay all that is owing to their employees, including the high rate of nominal interest. However, the amnesty will make it easier to secure outstanding employee entitlements, by setting aside the penalties for late payment that are normally paid to the Government by employers.”

“Employers that do not take advantage of the one-off amnesty will face higher penalties when they are subsequently caught – in general, a minimum 50 per cent on top of the SG Charge they owe. In addition, throughout the amnesty period the ATO will still continue its usual enforcement activity against employers for those historical obligations they don’t own up to voluntarily.”

The Super Guarantee amnesty is included in the Treasury Laws Amendment (Superannuation 2018 Measures) Bill 2018. If the Bill passes, the amnesty is intended to apply for the 12 months starting on 24 May – the date the Bill was introduced and the measure first announced.

The Bill also includes other superannuation-related measures – the Super Guarantee change for employees with multiple employers from the 2018 Budget, and changes to the Non-Arm’s Length Income and Limited Recourse Borrowing (LRBA) rules.

Under the Bill the Total Superannuation Balance can include outstanding LRBA balances, in certain circumstances. The Government had for some time wanted to include LRBAs in the Total Super Balance, which was strongly criticised by superannuation and tax professional associations, but appears to have limited this change in the Bill.

The Non-Arm’s Length Income (NALI) changes clarify the treatment of non-arm’s length expenses.

This article has been updated to reflect the LRBA and NALI changes in the Bill.

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Diversification of SMSF investments top priority for advisers

Diversification is the top priority for advisers when choosing SMSF investments, according to new research.

Research commissioned by BT and the SMSF Association found that 78% of advisers thought diversification was the top priority for SMSFs when selecting investments. 48% chose capital growth, 45% capital preservation, 42% liquidity and 41% product costs.

Almost all advisers surveyed – 97% – agreed that it was important that their SMSF clients have well diversified portfolios, but not all SMSFs are achieving this goal.

The same research paper found that 73% of advisers believe their SMSF clients had well diversified portfolios. This may be because advisers find it harder to diversify SMSF portfolios, with 62% of advisers saying they found it difficult.

BT’s Head of Adviser Distribution Jo Moxey said this could be a result of direct property investments in SMSFs.

The research found 89% of advisers consider a portfolio of managed funds, direct shares and property to be diversified.

64% of advisers said a portfolio of 30 individual direct shares may not have enough diversification. 47% of advisers said a portfolio of Exchange Traded Funds (ETFs) is sufficiently diversified. 87% believe having investments across four or more assets classes to be ideal.

“Diversification can be achieved in a variety of ways, but having access to a broad range of investment options is vital,” said Ms Moxey.

The BT/Investment Trends SMSF Planner Research Paper is based on a short quantitative online survey of financial planners between February and March 2018, with 163 responses. The research was conducted by Investment Trends and commissioned by BT Financial Group and the SMSF Association, as part of a four year partnership.

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Accounting body wants answers on 3 year SMSF audit change

The Institute of Public Accountants wants answers from the Government to questions about the 2018 Budget measure to move some SMSFs to audits every 3 years.

The Institute of Public Accountants (IPA) said it was working with Minister for Revenue and Financial Services Kelly O’Dwyer and the Treasury around the policy.

“We need to understand the policy rationale for the proposal to move to three-year cycles for SMSF audits,” said IPA chief executive officer Andrew Conway.

“How does reducing the audit cycle enhance regulatory oversight and transparency in the SMSF sector?”

“We know, that now more than ever, in the financial services space, sunlight is the best disinfectant. Without an annual SMSF auditor oversight, how will the regulator of the SMSF sector, monitor compliance?”

“These issues go far beyond the impact on SMSF auditors and speak to the very confidence and transparency of the SMSF sector.”

“Arguments around compliance costs are myopic at best as trustees are likely to be required to have a three year audit at greater total cost than the current (12 month) review. Will the unsubstantiated audit cost-saving be worth the significant risks such a measure introduces?”

The SMSF Association has been supportive of the Budget announcement, with CEO John Maroney saying it was a “fitting reward” for SMSFs that kept to the rules and that it would cut red tape for the sector.

Though Mr Maroney also said the Association was “keenly” awaiting implementation details of the policy.

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SMSFs to be required to have Retirement Income Strategy

SMSFs would be required to develop a Retirement Income Strategy under changes to superannuation being developed by the Government.

The Government has released a position paper on the Retirement Income Covenant, which would require super funds – including SMSFs – to develop a Retirement Income Strategy for members.

“For too long superannuation has been focused only on accumulating savings. A retirement income framework is a pivotal part of the Government’s reform agenda for superannuation – an agenda squarely focused on protecting and improving outcomes for superannuation members,” said Minister for Revenue and Financial Services Kelly O’Dwyer.

“To fulfil the overarching purpose of superannuation, it is essential that trustees develop a retirement income strategy and consider the retirement income needs of their members.” 

This follows from an announcement in the 2018 Budget that the Government intends to amend the SIS Act to “introduce a retirement covenant that will require superannuation trustees to formulate a retirement income strategy for superannuation fund members”.

The Retirement Income Covenant is part of the Comprehensive Income Product for Retirement (CIPR), which was a recommendation of the Financial System Inquiry (FSI) to require super funds to pre-select a retirement income option for members. The Government has been slowly progressing CIPR since it was recommended by the FSI in 2014.

According to the position paper the only part of the Retirement Income Covenant that would apply to SMSFs is the requirement for a Retirement Income Strategy.

In terms of the broader Retirement Income Framework, the Government plans to prioritise progress of the Retirement Income Covenant, followed by simplified and standardised disclosures for retirement products, then retirement income projections and finally the regulatory framework.

The superannuation industry has criticised CIPR as “neither necessary nor sufficient”, as currently designed, to meet its goals.

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Super funds heading for ninth consecutive year of positive returns

Super funds had a “strong” April, following a flat March quarter, setting them up for a ninth consecutive year of positive returns according to Chant West.

The ‘median growth fund’, with 61-80% in growth assets, was up 1.7% for the month of April, taking the returns for the first ten months of the financial year to a “healthy” 7.4%.

“With the cumulative return over the first ten months of the 2018 financial year sitting at 7.4% and markets also up in May so far, growth funds appear certain to finish the year in positive territory for the ninth consecutive time,” said Chant West senior investment research manager Mano Mohankumar.

“Additionally, funds are on pace to beat the typical long-term return objective which is about 5.5% to 6.5%,” he said.

“That’s better than expected and particularly impressive given that we’ve had such a great run over the past eight years with growth funds averaging 9% per annum. Additionally, asset managers have been saying for some time that all asset classes are close to or fully valued and that it’s becoming increasingly difficult to find additional sources of return.”

In April Australian shares were up 3.8%. International shares were up 1.9% in currency hedged terms, and up 2.8% in unhedged terms. Australian REITs were up 4.3% and global REITs up 2.9%.

Retail super funds outperformed industry super funds for the month 1.8% to 1.6%. Industry super funds usually outperform, and still maintain their lead over retail funds over the other time periods reported by Chant West. So far in 2017/18 industry funds are up 8.1% compared to 7.1% for retail funds.

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SMSF returns lag MySuper returns by 2.0% in year to March 2018

SMSF returns for the year to March 2018 were 2.0% lower than if they had invested the same as MySuper products.

SMSF returns for the period were 5.4% compared to 7.4% for default MySuper products, according to indices compiled by SuperGuard 360.

SuperGuard 360 calculates two indices to compare the return an SMSF would receive if investing as per the SMSF asset allocations in ATO statistics – the SG360 SMSF reference index – and the returns an SMSF would receive if they invested the same as the typical APRA-regulated MySuper product – the SG360 default index.

“Generally speaking SMSFs have a higher weighting to property than do MySuper options and a lower weighting to equities in general and international equities in particular,” said SuperGuard 360.

SuperGuard 360 said the lower performance of SMSFs was the result of lower weightings to growth assets, especially international equities.

“Three quarters of all SMSFs are small having assets less than $1 million. These funds, according to official ATO figures, have much higher weightings to cash and lower weightings to equities than larger higher performing SMSFs which hold the majority of SMSF assets,” said SuperGuard 360.

“This means that the majority of SMSF members are in funds likely to achieve lower than ideal investment outcomes. To ensure their retirement savings last as long as they do, SMSF members should review the amount they pay in fees and benchmark their portfolio to ensure  it is achieving the returns they are expecting. If they are achieving lower investment returns than the benchmark it is important they understand why.”

The SG360 default index has recorded higher returns compared to the SG360 SMSF reference index over 1, 3, 5 and 10 years. Over ten years the default index was 0.4% higher per annum, at 5.7% compared to 5.3% for the SMSF reference index. Though there are some points in time where the reference index has higher gains, or lower loses, than the default index.

SuperGuard 360 provides services to SMSFs, and is owned by Rainmaker Information.

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Government shouldn’t delay super and wage gap policies: ACTU

The ACTU has criticised the Government for delaying the announcement of policies aimed at the wage and superannuation gender gap until the second half of 2018, instead of including them in the recent Budget.

Before the 2018 Budget was released Minister for Revenue and Financial Services Kelly O’Dwyer announced that there would be a Women’s Economic Security Statement made in Spring 2018.

“This is entirely unacceptable,” said ACTU National Campaign Coordinator Kara Keys.

“The gender pay gap and the resulting gap in retirement savings leaves a huge number of women to retire in poverty. Action is needed now, not at a time which is politically convenient for a failing government.”

According to the ACTU the full-time gender pay gap is 15.3% across all industries, with this impacting women’s working lives and retirements.

Minister O’Dwyer has said the already legislated change to allow catch-up super contributions will help women in retirement. But Keys described the idea that women making additional voluntary super contributions would close the gender gap as “farcical”.

“Women deserve a government which sees the pay gap as a serious issue, not a political problem to be kicked down the road,” Keys said.

Industry Super Australia criticised the Government for raising over $1.6 billion from superannuation changes in the 2018 Budget, but not using these funds to address issues like unpaid super and the super gender gap.

The ACTU has been calling for superannuation to be paid on all forms of work, along with parental and domestic violence leave. It has also recommended paying Super Guarantee on all wages, not just Ordinary Time Earnings –  “which discriminates against women who more often rely on penalty rates to get by,” said the ACTU.

“None of these suggestions, or any other policy options, have been put forward by the Turnbull Government.”

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SMSF establishments at lowest level in years in December 2017 quarter

The establishment of SMSFs is at the lowest it has been since at least 2008.

According to the latest ATO statistics only 5,456 SMSFs were established in the December 2017 quarter – the lowest number of any quarter in years.

 SMSF establishments and wind-ups - June 2013 - December 2017

Data source: Self-managed super fund quarterly statistical report – December 2017

Note that the spike is wind-ups in the September quarter is due to action by the ATO, cancelling the ABNs of almost 9,000 SMSFs for which there was no evidence they were operating.

“As a result, there was an upward revision in the number of SMSFs that wound up in the September 2017 quarter. This also led to flow-on revisions of previously reported estimates for the total number of SMSFs and SMSF members for the quarter,” said the ATO. There can also be a lag in establishments or wind-ups being reported to the ATO, and so the data is subject to revisions.

Going back to earlier ATO data, it can be seen that the December 2017 quarter SMSF establishment figures are the lowest since at least 2008:

Though the total number of SMSFs is still growing, be it at a slower rate. Despite the small decline in the total number of SMSF and total number of SMSF members for the September 2017 quarter, due to the action taken by the ATO, at the end of December 2017 quarter there was a record number of SMSFs – 592,658 – and a record number of SMSF members – 1,118,848.

Total number SMSFs and SMSF members June 2013 - December 2017 quarters

 

Data source: Self-managed super fund quarterly statistical report – December 2017

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