The time is long gone when it was acceptable for any SMSF to be administered by a suburban accountant with a spread sheet and a collection of letters and notices in a shoe box. One million trustees of half a million SMSFs holding half a trillion dollars of assets – the sector is now a major political and financial force. But with power and profile comes responsibility, and administration and management of SMSFs must be as robust and accurate as possible. If trustees have the right to control their own super fund, they must ensure it is managed honestly, efficiently and in conformity with a vast array of rules and regulations. Every fund must be ‘industrial strength’.
The rise and rise of SMSFs
When Paul Keating wrote for the second edition of Cuffelinks, he made an extraordinary admission:
“When we laid the foundations for the current superannuation system in the 1991 Budget, I never expected Self Managed Super Funds to become the largest segment of super. They were almost an afterthought added to the legislation as a replacement for defined benefit schemes.”
That ‘afterthought’ is now an irresistible force. SMSFs are a remarkable feature of the Australian superannuation landscape. Although the ATO data is effectively two years old*, the March 2013 statistical report shows the following (and don’t make too much of March’s lower growth):
Table 1. ATO Self-managed super fund statistical report, March 2013
*The latest ATO data is only an estimate. The ATO states: The number of members of SMSFs is estimated based on SMSF return form data, with the estimates for June 2012 extrapolated from 2010-11 data.
How is a half a trillion dollars administered?
The largest banks and wealth management companies have allowed SMSFs to become a $500 billion industry administered by others, notably thousands of suburban accountants, supported by software provided by a few relatively small players. There is little or no SMSF administration done by the massive ‘industrialised’ systems of the largest financial institutions in the country.
There are several explanations for this. Until recently, technology had not advanced to such a degree where the largest banks and wealth managers thought they could administer the funds efficiently. SMSF administration was little more than a ‘cottage industry’, dominated by accountants as part of an overall tax management relationship. It is claimed that the largest SMSF administrator in the country is Cavendish, with 5,000 funds and 110 employees. This is only 1% of the market. Some large accounting firms which specialise in SMSF service have only a few hundred funds, and many accountants as few as a dozen. AMP has embarked on a major tilt at SMSFs, but at the moment, across all their businesses, administer about 10,000 funds (including Cavendish).
The second excuse relies on the reasons SMSFs are established: the desire for control, the ability to select specific stocks, to save money on fees, the perceived poor performance of large super funds, and the advice of accountants. A quick tick of these reasons explains much of the lack of impact by large institutions. Investing in a traditional retail or industry super fund does not give control over investments or stock selection, with the perception of high fees without decent performance. Little wonder when the friendly family accountant comes along and offers to do all the administration for $2,000 a year, removing $5,000 in management fees, that many investors make the jump.
Most large institutions seem to think that offering a bank account and link to their in-house broker is an SMSF solution. Take a look at the branches or websites of National, CBA and Westpac and their related wealth businesses. Each will claim they have an ‘SMSF Service’, but they crucially miss the establishment and administration services. For example, go into a National Bank branch and pick up their prettily-boxed package called ‘Retire in Comfort’. There is nothing in there on SMSFs. Type ‘SMSF’ into NAB’s search engine and it takes you to deposit accounts, borrowing and remarkable insights such as “an SMSF can own a farming property but it cannot operate a farming business.” But where is the entire SMSF package? Amazingly, they actually send customers away:
“You could use a lawyer who specialises in this area or purchase a deed from an SMSF service provider that has been ‘pre-prepared’ by legal experts.”
The other major banks are the same, with the possible exception of ANZ which offers an administration solution through Super Concepts. AMP has established the AMP SMSF unit, comprising Cavendish, SuperIQ, Ascend and Multiport. And the main response from the industry funds is to offer super wraps, such as Australian Super and its Member Direct offer. But they are not SMSFs.
Developments in SMSF software
In the last couple of years, there have been significant advances in the quality and availability of SMSF administration software. Barely a month passes without a new entrant announcing its product. The more established players such as Class Super, BGL, SuperIQ and Supermate continuously refine their products. This software is used by administrators and supports the better back offices of thousands of accountants, advisers and dedicated administration services.
The best software stores all supporting material electronically, including lengthy legal documents such as the trust deed. It ensures documents like the investment policy are regularly updated. Direct feeds into the software from stock brokers and the ASX record share transactions as they occur, bank account records are updated immediately and all dividends and interest payments are automated. There should be none of the scrambling around a year after 30 June, trying to identify transactions. Records are updated real time, and trustees can see their fund balances, transactions and investments on a screen at any time.
Technology has now reached the point where large players can offer full service solutions, and they are becoming more serious about moving into SMSF administration.
What are the shortcomings at the moment?
There are still thousands of SMSF administrators who have cobbled together their service using various automated and manual sources. Every SMSF is unique, and the administrators strain under the back office workload of identifying every transaction and keeping abreast of rapidly changing, complex regulations. There are an estimated 12,000 SMSF auditors but 50% of them perform less than 10 audits a year – hardly a workload that fosters the required expertise. It is usually the SMSF administrator or accountant who chooses the auditor, which can lead to a cosy relationship, with the client paying an annual audit fee of around $500. Until the recent tightening of regulations, there was often a piecemeal approach to valuing assets, including property.
With predominantly inexperienced trustees unaware of their responsibilities, the potential for SMSFs to breach rules is obvious. The more common violations are loans to related parties, using trust assets for personal purposes, failing to lodge on time and exceeding contribution caps. As part of an annual audit, approved auditors must submit Auditor Contravention Reports (ACRs) for prescribed SMSF contraventions to the ATO. In the year to 30 June 2012, there were 8,125 SMSFs that had ACRs lodged containing 19,823 contraventions. It is not acceptable for a tax-advantaged structure to have such potential for non-compliance.
It is clear that ASIC is worried about some SMSF activities. ASIC commissioner Peter Kell recently warned that the regulator did not want SMSFs to become the ‘vehicle of choice’ of property spruikers. The former superannuation minister, Nick Sherry, has warned that low balance SMSFs need to watch the significant fixed costs, and that many trustees have no idea of their obligations.
Deloitte Access Economics recently wrote a report for ASFA called ‘Maximising Superannuation Capital’, and highlighted:
- SMSFs are usually managed at a family level, with one person as the primary manager. If that person dies, leaves the family or becomes incapacitated, the other trustees may not have the skills to continue SMSF management.
- The asset allocation of an SMSF moving from accumulation to pension as the members age takes a lot of skill to manage. There may also be problems of high fixed costs as the fund reduces in value.
- One million members represent a massive voter block, and they are more difficult to influence than large funds, which can be directed by regulators to follow a certain course. The regulation of SMSFs by the ATO is also different. Public industry and retail funds are regulated by the Australian Prudential Regulatory Authority, while the ATO relies on auditors to control compliance issues.
Penalties for non-compliance or breaches
From 1 July 2013, the ATO will fine trustees directly, and potentially their advisers and accountants, for breaches in the management of their SMSF. Depending on the type of non-compliance, fines start at $850 for relatively minor offenses, and could be as high as $10,200 for a breach such as lending to a member. Fines cannot be paid for by, or claimed as an expense of, the fund but must be paid by the trustee, and it appears that the ATO has no discretion whether to charge the fine or not. Fines will apply for minor breaches, such as not maintaining records correctly or failing to advise of fund changes. Many will think these are innocent oversights which might previously have been corrected without penalty. In addition, new rules have been introduced on valuing off-market assets. The incentive to maintain a complying SMSF is enormous.
The large institutions are not even attracting the investments
The large banks and wealth managers should be servicing the SMSF space better because they are not only missing the administration role, but they are not managing the investments. Most large retail and industry super funds monitor their inflows by source and outflows by destination, and they are all losing money to SMSFs. Industry consultant, Tria Partners, estimates that 50,000 Australians leave public funds for SMSFs each year.
The ATO’s estimated SMSF asset allocation is:
- 37% listed shares and trusts
- 28% cash and term deposits
- 15% real estate, mainly non-residential
- 9% unlisted trusts and 5% ‘other managed investments’.
So the massive managed fund industry, comprising perhaps 200 product providers and once the dominant players in wealth management, takes less than 15% of SMSF assets in the ‘managed fund’ space. They must address their entire SMSF strategy.
In summary, we have an SMSF administrative system holding one-third of all superannuation and the retirement dreams of a million Australians being managed predominantly by small players in Australian finance. For those who choose to use it, SMSF software is improving rapidly, but most trustees are unlikely to fully understand their legal obligations and requirements of their trust deed. Many are in for a shock when they learn of the severity of the new fines for breaches of the even the most minor of the SMSF regulations.
It would be a far more secure and robust sector if the administrative solutions had minimum ‘industrial strength’ standards, such as real-time updates, online tracking of every investment, and a complete history of trustee decisions. It would also inspire more confidence if it were backed by the capital and resources of Australia’s largest financial institutions.