Productivity Commission modifies original findings based on Class research; still more work to be done
18 January 2019: The Productivity Commission has modified its original findings and recommendations in response to evidence-based research from Class.
Class’ research highlighted that ATO’s calculated SMSF returns were systematically understated across all fund sizes relative to APRA returns, due to different calculation methodologies being applied.
The Commission’s final report ‘Superannuation: Assessing Efficiency and Competitiveness’, states:
“Class Ltd. (sub. DR190) and the SMSF Association (sub. DR194) submitted that differences in the approaches used by the ATO (for SMSFs) and APRA (for APRA-regulated funds funds) understate SMSF returns relative to the APRA formula. With the assistance of additional data provided by the ATO and Class Limited, the Commission confirmed this to be the case, with the aggregate impact on reported SMSF returns in the order of 1 percentage point a year (tech. supp. 4).”
However, despite these welcome modifications, Class is concerned that its research findings have not been fully reflected in the Commission’s final recommendations:
• Instead of adjusting the ATO’s measure for contributions tax and insurance along with the denominator effect outlined by Class (a collective impact of 1.15 percentage points per annum compared with the APRA methodology), the Commission instead chose to only adjust for the denominator effect. This results in an adjustment of 0.44 percentage points, representing less than half of the actual impact. Additionally, the contributions tax and insurance impacts are greatest for SMSFs with less than $500,000 in net assets – Class data from FY2015 showed the combined returns impact of both was 1.27 percentage points for SMSFs in the $200k-$500k grouping and 5.08 percentage points for SMSFs in the <$50k grouping.
• The Commission used the ATO’s ‘Expenses’ without adjustment as a measure of the fees associated with SMSFs. However, there are a number of items which the ATO classifies as expenses that are not actually fees. These include insurance, interest, and capital works and depreciation. While ATO expenses are relevant for accounting and taxation purposes – which is the primary reason the ATO collects this data – the figures are very different from the fees calculated by APRA, which measure the operating and investment costs associated with funds.
The second submission from Class to the Productivity Commission highlighted that by incorrectly combining expenses and fees, the Commission had overstated SMSF costs across all fund sizes. In particular, the expenses quoted by the Commission for SMSFs with less than $500,000 in net assets were close to double the true costs.
Glenn Day, acting CEO at Class comments: “Industry discussion continues around the need for increased member education when establishing SMSFs, and the reality that SMSFs are not suitable for everyone. However there remains a separate need to understand the economic efficiency and viability of operating SMSFs at various net asset levels, using like-for-like comparisons and measures to avoid drawing incorrect conclusions on returns and costs, particularly for smaller SMSFs.”
A full copy of the Class submissions can be downloaded below:
Lilian Keaty, Marketing Director
Phone: 0449 697 035 or (02) 9016 3063