Insights:
- SMSFs continue to attract members despite the challenging macroeconomic conditions such as rising interest rates and the cost-of-living crisis.
- The proposed Division 296 tax liability will be costly for high-balance SMSFs, with an estimated average tax per member of $49,925 in FY23, drawing into sharp focus liquidity issues for those invested in property and the need for financial advice.
- The SMSF sector will benefit from improved access and affordability of financial advice as the industry awaits Tranche 2 of the Quality of Advice Review recommendations.
The 2024 Class Benchmark Report highlights the strength, resilience and continued appeal of SMSFs with younger generations.
Headline stats in the report showed there are now over 625,600 SMSFs in the sector in FY24, with an establishment rate of 5.2%.
The average balance of newly established funds on Class grew by 9.2%, increasing from $492k to $537k, and Generation X was the largest establisher of new funds (52.9%), together with Millennials, accounting for 80.6% of new funds.
Against this backdrop, a panel session held at the recent Class Ignite conference hosted by Class CEO Tim Steele and featuring Class General Manager Operations Kate Anderson, SMSF Association CEO Peter Burgess, Accurium Principal Melanie Dunn and Heffron Managing Director Meg Heffron – discussed the top insights from this year’s report, highlighting the opportunities and the challenges for the SMSF industry.
SMSFs have broad appeal but more can be done
According to the panel, SMSFs continue to be established because superannuation balances have grown, SMSFs are flexible, and they allow investment in direct property.
Younger generations such as Millennials and Generation X who have had compulsory superannuation most of their lives, have higher balances, fuelling engagement. Factors such as technology and access to different asset classes such as ESG investments and crypto, are also appealing to them.
But property remains a key attraction to SMSFs, particularly for younger members trying to get into the property market.
“It’s at the top of the list for Millennials – control, flexibility and the opportunity to invest in property,” said Anderson.
For this reason, younger generations look to their SMSF to invest in property which they otherwise could not afford.
“It’s too expensive to invest in their own home and there is a stronger cash flow coming into super than in savings,” said Heffron.
However, although SMSFs are doing well in attracting younger generations, SMSFs need to be active in their engagement strategy.
“SMSFs are not a well-known product. There’s still a lot of work to be done and engaging with client’s kids can help Millennials to understand them.” – Melanie Dunn, Principal, Accurium
While the trend for younger generations to engage with SMSFs was welcome, Burgess noted it is important to not forget the older generations who are also driving significant growth in establishments.
“Those closer to retirement are driving these numbers too. They are moving to SMSFs because they are not happy with the existing service.”
Proposed Division 296 tax liability quantified for the first time
This year’s report found the proposed Division 296 tax liability is set to significantly challenge high-balance SMSFs, with an estimated average tax per Class SMSF member of $49,925 in FY23.
The panel agreed while this amount is significant, another challenge with the proposed tax was that an SMSFs liability was linked to market performance, making it unpredictable and erratic and difficult to plan for.
“How do you manage cash flow when you don’t know the liability from one year to the next?” asked Burgess. He predicted this may see members holding more cash than they need to just to cover their perceived liabilities, limiting the amount of invested funds they have to generate returns for retirement.
“While the tax may be easy to run for the ATO, it is hard to plan for. The big issue is it’s so jumpy. It’s a bit scary to say the obligation is a random number.” – Meg Heffron, Managing Director, Heffron
Dunn also noted such uncertainty makes it difficult for members to set an investment plan. “With volatile swings in asset values, how do you set an investment strategy that delivers that cash value.”
In October, the proposed Div 296 tax bill passed the Lower House of Representatives and will progress to the Senate. Burgess said the SMSF Association was looking at other ways that enable “clawing back tax concessions from people with large balances but which doesn’t compromise the tax system in the process.”
Advice could be used more to maximise SMSF benefits
Retirement is a trigger which many people need help to plan for, yet accessing advice is becoming more difficult due to factors such as the cost-of-living crisis and inflation.
Currently, more than 72% of Class SMSFs do not receive professional advice, which has marginally increased over three years to FY23. Over the same period, there has been a 5.7% decline in advisers and a 4.7% increase in total SMSFs, highlighting the growing gap between the available supply of advisers and the increasing demand for financial advice in this sector.
“People need advice to make good investment decisions, and if they can’t get it, who are they going to turn to?” asked Dunn. The later members access advice, the less levers there are to pull to make a difference to their retirement savings.
Regulatory change as part of the Quality of Advice Review, in particular tranche two, could improve access and the affordability of advice through the proposed changes to Statements of Advice (SOA), safe harbour and best interests duty as well as the introduction of personal advice and retirement advice.
“It is the last chance to get it right and meet the unmet need for advice and it will be great for SMSFs,” said Anderson.
These changes could also foster greater recognition of the value of advice. “If people want to read the recommendations of their adviser and understand them, they will value advice more,” said Dunn.
Burgess noted research on SMSFs shows many people do not establish an SMSF because of the cost of advice, saying improved access would help the sector.
Older Australians commit to non-concessional contributions
Older Australians are leading the charge in non-concessional contributions, taking advantage of the removal of the work test, with 50.6% of all non-concessional contributions coming from members aged 65 and over in FY23.
Significantly, non-concessional contributions increased from $555 million in FY22 to $899 million in FY23 for the 66-70 age group, and from $232 million to $936 million (more than four times) for the 70+ age group during the same period.
While all the reasons why this is happening are unclear, panellists noted it was an area where advisers could add value in strategy. Indeed, despite the trend for SMSFs to not get advice, Burgess said it could suggest older Australians are getting advice as non-concessional contributions as part of a tactical and complex retirement strategy.
Challenges for the future
As SMSF’s continue to grow, it is likely the Australian Taxation Office and the Government will want more data. Burgess warned accountants this will mean more requests for information.
“There will be more regulatory processing, it’s inevitable. We’re a big industry and the government will want to make sure it’s performing.” – Peter Burgess, CEO, SMSF Association
Cyber security was also identified by the panel as a challenge, with Burgess noting the recent standards set by APRA on large funds which include multi-factor authentication standards.
“We don’t want to be the weak link being left behind.”
APRA funds were also identified as challenges going forward, with panelists commenting they have ‘upped their game’ around investment options such as ESG, direct investments and property options.
For a full copy of the Class 2024 Annual Benchmark Report, please visit here.
Disclaimer
The information contained in this document is provided by Class Pty Ltd ABN 70 116 8023 058 (Class), which is a subsidiary of HUB24 Limited (HUB24) and is current as at the date of publication. It is factual information only and is not intended to be financial product advice, legal advice or tax advice, and should not be relied upon as such. This information is general in nature and may omit detail that could be significant to your particular circumstances. Accordingly, before acting on any of this information, the viewer should consider the appropriateness of the information having regard to their or their clients’ objectives, financial situation and needs. This information is provided in good faith and derived from sources believed to be accurate and current at the date of publication. The information given in this document is in summary form and does not purport to be complete. While reasonable care has been taken to ensure the information is correct at the time of publishing, superannuation and tax legislation and circumstances can change from time to time. Accordingly, neither Class, nor HUB24 nor any of their related bodies corporate make any representations or warranties as to the completeness or accuracy of the information in this document and none of these entities is liable for any loss arising from reliance on this information, including reliance on information that is no longer current. We recommend that you seek appropriate professional advice before making any financial decisions.
