Appendix 2 – Data issues

Data limitations due to changes in ATO data collection affect annual comparisons of SMSFs data.

In 2013, changes were made to the SMSF annual return to improve data collection on SMSF asset holdings and expenses, which affected the analysis of SMSF data and comparisons over previous year data. The main label changes affecting analysis include:

  • The addition of sub-labels to report on the types of assets held under limited recourse borrowing arrangements. 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” and “administrative and investment 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 are only required to do so under certain circumstances. However, anecdotal evidence also suggests that market value reporting is becoming more common for SMSFs – particularly for those funds investing substantially in listed shares, managed funds and cash assets.
  • 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.
    Last modified: 15 Dec 2014QC 43403