- The addition of sub-labels to report on the types of assets held under limited recourse borrowing arrangements (LRBA). Also, updates to return form instructions were made to clarify how LRBA investments should be reported and this has largely resulted in the increases of LRBA assets reported by SMSFs in 2013.
- New labels to report on the ‘non-deductible expenses’ incurred by SMSFs particularly those in pension phase. The relevant non-deductible expense items have been incorporated into the calculation of “total operating expenses” into the net flow of funds analysis.
Data limitations and differences in methodologies affect comparisons of SMSFs with non-SMSF sectors.
In 2010, we moved to a new integrated core processing (ICP) system for the collection and handling of our data holdings, which has affected the reproduction of certain historical SMSF data. Continual improvements will be made to the methodologies of reporting SMSF information, which may result in changes to figures in the future.
Differences in methodologies can include:
- Valuation and accounting practices might lead to incorrect calculations of ROA. In particular, APRA funds must report assets at market value, while SMSFs have a requirement to value all assets to their market value for the 2012-13 and future years
- Treatment of tax might differ between APRA funds and many SMSFs. APRA funds generally make full provision for income taxes on an accruals basis, as do many SMSFs. However, again, SMSFs are not required to do so and many do not – in which case, tax is effectively treated on a cash basis.
- Pension funds exemption from income tax on investment earnings will mean pension funds have higher after-tax returns than an identically invested accumulation fund. Given that SMSFs have a proportionately higher number of member accounts in the pension phase, there is potential for the ROA of the whole SMSF population to be overstated.
- Under or overstated costs, because cost amounts for SMSFs are determined based on amounts included in the SMSF annual return – rather than the actual expenditure on fund costs. For example, such costs could include:
- Life insurance and related cover, if only a portion of the premium is deductible depending on the type of insurance cover.
- Opportunity costs, because the cost of a trustee’s time and effort in operating the SMSF are not captured. These costs are more likely to be reflected in APRA funds.
- Costs incurred in pension phase SMSFs, if only a part of an SMSF’s total expenditure is tax deductible, because the fund is not entitled to a deduction for expenses incurred in deriving exempt income. Relying exclusively on tax-deductible expenses to identify operating costs might understate the costs of pension phase SMSFs in 2012 and prior years by up to 100% (for an SMSF entirely in pension phase).
- Invisible costs potentially arise when assets are held through an external investment structure, such as a trust or managed investment scheme, rather than directly. Under these circumstances, fees charged by the investment structure will be expensed within the structure and only the net return remitted to the SMSF via distributions. This will not undermine the ROA calculation, because whether the expenses are incurred directly or in another vehicle, the net return to the SMSF is identical. However, the fees charged by the investment structure will not be taken into account in operating expense calculations because the calculations only capture expenses actually occurring within the SMSF. This can occur in both SMSFs and APRA funds.
- Advice costs, how (and whether) advice is received and paid for also affects comparisons.
- Establishment costs, which are incurred by SMSF members, but due to their capital nature are not deductible or able to be amortised over a defined life.
- Management expense ratios (MER) of public offer funds – there are a number of other membership features in a public offer super fund that make its published MER figures not directly comparable with the operating expense ratio of an SMSF (such as contribution fees, buy/sell spreads, insurance premiums and exit fees) but this is outside the scope of this publication.
Number rounding has been used in order to comply with privacy legislation and regulations. Some cells in some tables have been aggregated, however this does not affect the total number of records or the total amounts.
Appendix 3 – Glossary
Accumulation phase funds – funds are considered to be in accumulation phase if no members are receiving income stream benefit payments nor reporting exempt current pension income.
All other assets – are the asset types that make up an insignificant proportion of total asset values. They include insurance policies, debt securities, loans, unlisted shares, collectables and personal use assets, overseas shares, overseas non-residential real property, overseas residential real property, overseas managed investments and other overseas assets as reported on the SMSF annual return.
APRA funds – include corporate, industry, public sector and retail funds. Unless specified as ‘APRA funds with more than four members’, they also include small APRA funds (SAFs) and single-member ADFs.
Benefit payments – refer to member benefits paid out to the member. From 2013, these are reported at two labels, super lump sum payments and super income stream benefit payments and include (but are not limited to) transition to retirement income stream payments.
Borrowings – outstanding borrowings by the SMSF, including accrued interest. These include (but are not limited to) borrowings under a limited recourse borrowing arrangement.
Direct investments – are SMSF investments located in Australia and overseas where the SMSF directly holds the assets, either in the name of the SMSF or in another legally recognised form. These include but are not limited to) cash and term deposits, debt securities, loans, listed shares, unlisted shares, limited recourse borrowing arrangements, non-residential and residential real property, collectables and personal use assets and other assets.
Employer contributions – are as reported on the SMSF annual return. These are contributions received from employers and includes (but is not limited to) all mandated employer contributions such as superannuation guarantee, awards, agreements or other obligations, salary sacrifice, super guarantee charge shortfalls and amounts transferred to the SMSF for the member from superannuation holding accounts special account (SHA special account).
Full pension phase funds – are a subset of ‘pension phase funds’, in particular where all members are receiving a form of income stream benefit payment (including transition to retirement) and the fund reports exempt current pension income.
Income stream benefit payments – refer to member benefits paid out to the member as an income stream life benefit, transition to retirement income stream, death benefit and other income stream benefits such as (but are not limited to) member’s temporary or permanent incapacity.
Inward rollovers – refer to inward amounts received for the member in the form of transfers or rollovers within the superannuation system and may include contribution-splitting superannuation benefits, transfer of benefits as a result of family law obligations and reversionary pension or entitlements.
Lump sum benefit payments – refer to member benefits paid out to the member as a lump sum life benefit, death benefit, terminal medical condition benefit, release authority payments and other lump sum benefits such as (but are not limited to) permanent incapacity, severe financial hardship, approved compassionate payment).
Managed investments – are SMSF investments in other entities that then make subsequent investments on behalf of the SMSF. These include (but are not limited to) listed trusts, unlisted trusts, insurance policies and other Australian and overseas managed investments.
Member contributions – are as reported on the SMSF annual return. These are contributions received from members and include (but are not limited to) personal contributions and small-business exemptions. This item does not include rollovers or transfers from other superannuation entities.
Operating expenses – as referred to in this report include deductible and non-deductible expenses reported at the following SMSF annual return labels: interest expenses within Australia, interest expenses overseas, insurance premiums – members, SMSF auditor fee, investment expenses, management and administration expenses, forestry managed investment scheme expense and other amounts.
Outward rollovers – refer to member benefits paid out by the SMSF for the member in form of transfers or rollovers within the superannuation system and may include contribution-splitting superannuation benefits, transfer of benefits as a result of family law obligations and reversionary pension or entitlements.
Partial pension phase funds – are a subset of ‘pension phase funds’, in particular where not all members are receiving an income stream benefit payment (including transition to retirement) and the fund reports exempt current pension income.
Pension phase funds – funds are considered to be in the pension phase if at least one member receives an income stream benefit payment (including transition to retirement) and the fund reports exempt current pension income.
The annual overview of the self-managed superannuation fund (SMSF) sector for 2013–14. The reported data is mostly collected from the SMSF annual return (SAR), SMSF registrations and auditor contravention reports.