Changes to performance calculations cautiously welcomed

The SMSF Association welcomes adjustments made by the Australian Tax Office (ATO) to align their SMSF performance calculations more closely with the methodology used by the Australian Prudential Regulation Authority (APRA) to calculate returns for APRA-regulated funds.

Association CEO John Maroney says: “All else being equal, it has been widely acknowledged that the ATO’s calculation methodology used to calculate median investment returns for the SMSF sector underestimates the true performance of SMSFs relative to the APRA sector. The 2018 Productivity Commission report into the efficiency and competitiveness of superannuation confirmed this finding.”

In the glossary accompanying the release of the ATO’s 2019-20 SMSF statistical overview report last week, it advised that in line with recommendations in the independent research by the University of Adelaide’s International Centre for Financial Services (ICFS) into the investment performance methodology used by the ATO, the fund’s asset value at the beginning of the period is now being used. Previously, the average value of assets over the period was used. Furthermore, the calculation is now based on contributions gross of tax. Previously, it was net of contributions tax.

Both changes are designed to reduce the gap between the respective calculation methodologies used by the ATO and APRA.

Maroney says: “The ATO’s decision to make these important adjustments is a positive step to ensure a level playing field when comparing the investment performances of the different superannuation sectors.

“However, it’s critical to note that the ICFS’s research estimated these changes, for the period of the review, would have only accounted for between 25% and 50% of the performance gap.

“Given the way the data is collated and the different data inputs (the ATO uses information from SMSF annual returns while APRA uses information from fund financial statements), the ATO’s adjusted median return calculations are still likely to generate materially lower performance estimates relative to APRA-regulated funds (all else being equal).

“For this reason, while it may be appropriate to use the ATO’s ‘median’ investment return figures to compare the performance of the SMSF sector relative to other years, they should not be used to compare the performance of the SMSF sector with other superannuation sectors.”

Resolving the differences between the ATO and APRA calculation methodologies was the first objective of the research recently commissioned by the Association and released last week by the ICFS. It was a necessary first step in any investment performance analysis that looked to position SMSFs within the broader context of the superannuation industry.

Maroney concludes: “The SMSFA/ICFS research overcame these differences by using financial statement data from a large sample of SMSFs (the largest data sample ever used for this type of research) to calculate an annual return for each fund based on the same calculation methodology used by APRA to calculate returns for APRA-regulated funds.

“We also caution readers of the ATO’s SMSF statistical overview reports from using ‘average’ SMSF returns that are displayed next to SMSF ‘median’ returns to compare the sector’s performance against other sectors. For the reasons outlined in our research report, average returns that are pooled returns tend to be more representative of the investment performance of the larger funds in the data sample rather than the small funds.”