Finance Your Super Self-managed super funds are a massive tax-saving plan for the well-to-do
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Self-managed super funds are a massive tax-saving plan for the well-to-do

Some very wealthy people use SMSFs as a tax strategy. Photo: Getty
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Self-managed superannuation funds are being used as a tax strategy by wealthier Australians rather than as a retirement savings mechanism, according to financial specialists.

SMSF members made up 7.4 per cent of the total number of super fund members in 2017, but accounted for 52 per cent of the personal, or voluntary, contributions. In dollar terms, that amounts to $34.6 billion.

It’s an entirely different story with the pooled funds handling superannuation for 92.6 per cent of Australians.

Australian Prudential and Regulation Authority (APRA) figures show that employer contributions for the year to June 2017 accounted for $92.5 billion of pooled-fund contributions and only $7.13 billion of SMSF contributions.

The personal contributions made to SMSFs are voluntary and show their owners have plenty of spare cash to invest. And the preponderance of older members means the contributions are seen as a tax-saving strategy.

“Those contributions don’t appear to be complying with the purpose of super,” said Brendan Coates, superannuation specialist with the Grattan Institute.

“They are not about genuine savings for retirement; they are more about putting money in super in later years and taking it out again.”

SMSFs have an older member cohort.

“You pay 15 per cent contributions tax, 15 per cent on earnings for a few years, and then it’s tax free for the rest of your life,” Mr Coates said.

Not only are the contributions voluntary, they are often non-concessional and are subject to upper limits of $100,000 a year, up until a balance of $1.6 million.

“Where contributions are non-concessional [SMSFs] are used as a savings vehicle,” said Helen Hodgson, taxation law professor at Curtin University.

SMSFs emerged in the mid-1990s and were a tool used by accountants to deliver wealthy people a tax shelter.

That driver worked so well that the figures on SMSFs are astounding.

With only 7.43 per cent of total superannuation membership, they until recently had the largest asset holding of all super sectors.

As of September, APRA says they are line ball with industry funds. They hold $746.2 billion under management; industry funds, $747.4 billion.

The difference in average assets between SMSFs and pooled funds is also astounding.

The average SMSF has $1.1 million in the kitty compared to $120,00 for the average pooled fund. If you look at industry funds alone the average is closer to $60,000.

As a result of that difference, the average payout for SMSF retirees is $94,290 compared to $25,972 for pooled funds in pension mode.

The reason for the difference, of course, is that SMSF members have lots of money on average and can pay themselves big pensions.

As the chart above shows, so big are SMSF pension payouts that they are only about 8 per cent below the pooled funds that account for 92.6 per cent of all superannuation fund members.

While SMSFs are massively bigger than pooled funds on average, there is also a huge division within the SMSF sector itself.

Regulators have warned that too many small funds make inadequate returns, while many take unacceptable risks with leveraged property buying.

A Productivity Commission report released a year ago found almost half of Australians with self-managed super funds were undercutting their own retirements with SMSFs that were too small to make good  returns.

“Large SMSFs earn broadly similar net returns to APRA-regulated funds, but smaller ones (with less than $500,000 in assets) perform significantly worse on average,” the commission found.

And despite APRA expressing concern about SMSF borrowings for at least five years, debt in the funds blew out by 47.5 per cent in the year to September 2017 as regulators tried to wind back property investment.

In its report on super, the PC said: “Large SMSFs earn broadly similar net returns to APRA-regulated funds, but smaller ones (with less than $500,000 in assets) perform significantly worse on average.”

SMSFs are also useful for small business people who cannot put savings away during their working lives. Some of these people put their business premises in their fund and use it to retire on.

The New Daily is owned by Industry Super Holdings

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