Housing affordability could be the catalyst that drives more millennials to set up SMSFs to gain access to the market, a panel has heard.
The Coalition has already launched the First Home Super Saver scheme which allows up to $15,000 of voluntary contributions to be used buy a first home, and it will also take to the election a policy proposal that would allow up to $50,000 of any super contributions to be withdrawn to buy a first home.
However, Class general manager Kate Anderson noted the potential appeal of SMSFs for high-balance millennial super fund members.
“Australians have a love affair with property, let’s be real,” Anderson said, during a panel discussion on Wednesday morning at Ignite, held by HUB24-owned SMSF administration service provider Class.
“Most people are setting up a self-managed super fund to invest in property.”
Anderson said millennials living in capital cities will lead the charge into SMSFs because they have a large balance in their super fund, and it will take them too long to save outside super for a deposit where they live. Instead, they would rather set up an SMSF and enter into a limited recourse borrowing arrangement.
“I know that’s quite topical and quite controversial, but when you have conversations that I’m still having with financial planners and accountants – that’s at the top of [mind] of those millennials,” Anderson said.
Heffron managing director Meg Heffron agreed with Anderson, noting millennials not only have the balances to support the investment but the income due to a double-digit superannuation guarantee.
“If you’ve got a couple and they’re forced to put 12 per cent of their income into super every year they’ve probably got stronger cash flow coming into their self-managed super fund combined than they’ve got coming into their bank account to pay off a mortgage,” Heffron said.
Although SMSFs might offer a lifeline for younger people priced out of the housing market, the strategy could still put them at odds with AFCA, which is wary of poorly diversified SMSFs that are heavily concentrated in property.
The commentary comes as Class presented its Annual Benchmark Report on SMSFs which showed millennials (aged 28-42) are the second-largest generational demographic setting up SMSFs, accounting for 27.7 per cent of all establishments in in FY24.
However, they are still dwarfed by Gen X (aged 43-57) who still lead with 52.9 per cent of new fund establishments.
The median age for new fund members on the Class platform was 49 – the same as FY23 but up from 46 in FY22 – and still trending downwards from 54 in FY11. However, the average balance of newly-established funds increased 9.2 per cent to $537,000 in FY24 from $492,000 the year before.
Big super lifting their game
The government and regulators have spent the past two years lambasting APRA-regulated super funds for a laggard response to the Retirement Income Covenant and while it has slowly improved, the panel noted the improvement for decumulation strategies presents more of an opportunity rather than threat to the SMSF sector.
The panel noted data presented at last year’s conference which showed only half of eligible members in APRA funds were in tax-exempt income streams versus seven-in-eight SMSF members, but Accurium principal and senior actuary Melanie Dunn said APRA-regulated funds are “upping their game” when it comes to member value proposition.
“We’ve seen the retirement income strategy come into play and APRA funds are working at looking at how they can engage members are tailor solutions for retirement,” Dunn said.
“They’ve already stepped up when it comes to investment options. Australian Retirement Trust, AustralianSuper… a number of them offer direct investment options that allow you the flexibility and control to tailor a superannuation for you without the responsibility of running an SMSF.
“The SMSF sector has a strong opportunity to go beyond what [APRA-regulated] super funds can do at the moment – real property, being able to invest in businesses, and managing your super as a household remain really strong value propositions for the sector.”
The fight for unrealised gains
The Division 296 tax, the Labor government’s proposed changes to tax concessions for super balances above $3 million, remains a key challenge for the SMSF sector, particularly the impact the legislation will have on taxing unrealised gains.
Modelling by Class using internal data found there will be a total tax liability per year of $825.3 million across 16,431 class members and 5 per cent of those affected will have insufficient cash flows to pay.
Ahead of the panel discussion, Class CEO Tim Steele told Professional Planner it’s a “materially significant” issue for superannuation generally, but SMSFs in particular.
“We think about the lifeblood of the Australian economy – small to medium sized business owners and farmers who have typically used an SMSF structure to hold property,” Steele said on the eve of the event.
“They’re just less likely to be able to do that with the $3 million cap given the taxing of unrealised gains and liquidity challenge that might create. There are real unintended consequences from Div 296 that are still playing out.”
The bill was meant to be debated last week in the lower house, but will now have to wait until at least the next sitting week, starting 8 October.
During the panel, SMSF Association chief executive Peter Burgess said the bill will pass the lower house, but once it reaches the Senate things will “heat up” because the government doesn’t have the numbers to pass it without crossbench support.
“We’ve met with all the Senate crossbenches over the last few months and from what we know from those discussions, the government does not have three votes from the Senate crossbench to get this bill through the Senate,” Burgess said.
“That’s encouraging and we’re doing everything we can right now to make sure that stays that way.”
Burgess said there are other ways the government could claw back tax concessions for large balance accounts which don’t involve taxing unrealised gains. “That’s what we’re trying to achieve right now,” he said, adding the association believes it has made progress.
“That hasn’t been an easy conversation with the crossbench. I remember the early days, not all the Senate crossbenchers were convinced they had to expend any political capital fighting for people that have got more than $3 million, and I was shown the door on more than one occasion in those early days.”
