Small APRA funds: What are they and why would I need one?

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What is an SAF?
What does the licensed trustee do?
Would a SAF suit me?
Investing with a SAF
What are the pros and cons of SAFs?
How much do SAFs cost?
SAF vs SMSF: How do they compare?

SMSFs have many advantages if you’re looking to save for your retirement and want to have a lot of say in what and how your savings are invested.

Unfortunately, they also come with a lot of trustee responsibilities to ensure you meet all the compliance rules and reporting requirements.

That’s where small APRA-regulated super funds (SAFs) come in. If you want to get hands-on with your super savings, SMSFs are not the only option.

SAFs are an often-overlooked option offering many of the same benefits as an SMSF, but without the heavy administrative burden that comes with being the trustee of your own super fund.

What is an SAF?

SAFs are a separate class of super fund and, like SMSFs, are limited to six or fewer members.

Unlike SMSFs, which are regulated by the Australian Taxation Office (ATO), SAFs are regulated by the Australian Prudential Regulation Authority (APRA), which is also the regulator of large public offer super funds.

Compared to most retail and industry super funds, SAFs are quite flexible. For some people, they actually provide a better alternative than their more popular sibling, the SMSF.

One of the key differences between SAFs and SMSFs is that the trustee of a SAF must be a professional licensed trustee company, rather the fund members being the trustee as occurs in SMSFs.

The professional licensed trustee company is required to obtain and hold a Registrable Super Entity (RSE) licence issued by APRA. Retaining a RSE licence is a complex and costly process, so SAFs are generally only available through large financial organisations.

As licensed trustee organisations providing SAFs offer a wide range of investments to fund members, they must also hold an Australian Financial Services licence issued by the Australian Securities and Investments Commission (ASIC). Read more about AFS Licences on the ASIC website.

Learn more about how SMSFs work.

Need to know: Residency and active member tests

Under super law, to be an Australian super fund, the fund must meet three tests:

It must be established in Australia, or any asset of the fund must be situated in Australia
Central management and control of the fund is ordinarily in Australia
Active members who are Australian residents hold at least 50% of the fund value.

As the licensed trustee of a SAF is both incorporated and managed from Australia, it ensures the fund meets the central management and control test.

SAFs meet the residency requirement provided non-resident members do not make contributions to the fund. If they wish to contribute, they must hold less than 50% of the fund assets and other Australian residents must be making contributions to the fund.

Learn more about the residency test.

What does the licensed trustee do?

The professional licensed trustee in a SAF manages the fund on behalf of the fund members and is responsible for the compliance and administration of the super fund.

The licensed trustee is responsible for:

Correctly establishing the SAF
Undertaking all the necessary asset and super administrative tasks
Monitoring the fund’s investments
Completing all the fund’s annual reports and compliance checks to ensure it meets its legislative obligations
Producing the fund’s accounts.

A SAF’s licensed trustee also ensures the death benefits of fund members are paid in accordance with valid death benefit nominations.

Learn more about death benefit nominations.

Need to know

Prior to 1 July 2021, SAFs were only permitted to have four or less members.

Following changes to the rules around SMSF membership numbers, from 1 July 2021 onwards SAFs are permitted to have six or fewer members in the fund.

Learn more about six-member SMSFs.

Would a SAF suit me?

SAFs may be suitable if you’re looking for a super option outside the large retail and industry super funds, but don’t want to take on the administrative and compliance burden that goes with an SMSF.

SAFs can be suitable for:

People wanting control over their super savings without the responsibilities that come with being a fund trustee
Elderly people with their own SMSF looking for an exit strategy other than a large publicly-offered super fund
Older people concerned about their ability to run a compliant super fund if they lose mental capacity
People concerned about what would happen if the key decisionmaker in their SMSF dies
People intending to work or move overseas for a lengthy period
SMSF members finding running their fund has become too difficult, but you have specific investment asset requirements (such as business real property, related trusts or loans)
Someone wanting the ability to invest in SMSF-only assets (such as limited recourse borrowing arrangements and related trusts), but without the responsibility and burden of being a trustee
Someone disqualified or ineligible from running an SMSF, but who still needs to hold existing SMSF assets (such as business real property, related trusts or loans)
Families caring for an adult child with an intellectual disability
Blended families.

According to SAF target market determinations, these structures are unsuitable for those:

Seeking a guaranteed return of capital
Who don’t have an SMSF or intend to set one up
With short-term cash needs who don’t meet a condition of release
With simple investment needs who don’t need access to a broad range of investments
Who don’t have an adviser or are self-advised with an account manager to help transact of their behalf.

Good to know

SAFs are valuable for families caring for intellectually disabled adult children. A child with an intellectual disability is unable to be a trustee member of an SMSF, as under the law they are considered to lack mental capacity.

With an SAF, when the parent dies their death benefits can easily be paid to the child by the licensed trustee.

Investing with a SAF

Under the super rules, SAFs have the same ability as an SMSF to invest in a wide range of assets.

A SAF’s investments are directed by the members and, generally, the licensed trustee is not involved in making investment decisions unless the fund’s members fail to adhere to the fund’s established investment strategy. In this situation, the trustees will require the members to rectify the situation to ensure the SAF remains compliant with the super rules.

If you are interested in moving to a SAF, it’s important to check the investment assets acceptable to the licensed trustee.

Different SAF trustees have different rules relating to fund investments. For example, some SAF trustees don’t permit funds to invest in units in unlisted trusts. If you have special assets you wish to include in your SAF, it’s essential to carefully check the trustee’s rules before moving to a SAF structure.

Generally, if the overall investment portfolio is relatively diversified, a SAF may hold assets such as business real property, private company shares and collectables.

While an SMSF can have an undiversified investment portfolio (such as one mainly consisting of a large business real property), this may not be acceptable to the trustee of a SAF.

Need to know: SMSF exit strategy

SAFs can be a cost-effective exit strategy for SMSF trustees considering winding up their fund. When you convert an SMSF into a SAF, you are not required to pay capital gains tax (CGT) on the fund’s assets.

In this situation, the SMSF is not wound up and there is simply a change of trustee. The existing trustees retire and a professional licensed trustee is appointed in their place. The fund’s tax file number and Australian business number also remain the same.

The change in trustee doesn’t trigger a CGT obligation as the tax-paying entity (the super fund) has continued uninterrupted and has not disposed of any assets.

What are the pros and cons of SAFs?

Pros:

Reduced responsibility and administrative burden
High level of control of your super investments
Estate planning certainty
Security for ageing fund members worried about diminishing mental capacity
Ability to be a SAF member after being declared bankrupt
Professional licensed trustee helps avoid common legislative breaches
Ability to live or work outside Australia for an indefinite period without the SAF being declared a non-resident super fund
Licensed trustee is required to issue a Product Disclosure Statement (PDS) and annual member statements
Access to assets (such as wholesale investments) unavailable through an SMSF
Provides tax-effective exit strategy from an SMSF

Cons:

Potential limits on available investments (such as collectables or large commercial properties) depending on the professional licensed trustee’s rules
Financial planners are not required to hold and maintain specialist advice qualifications when advising on a SAF (required for SMSFs)
Licensed trustee controls custody of all the fund assets
More expensive than in-house administration by SMSF trustees
Fees generally charged as a percentage of fund assets

Good to know

SAFs offer a valuable opportunity to super members with an existing account-based pension (ABP) ‘grandfathered’ for Services Australia or Department of Veterans’ Affairs purposes.

Grandfathered ABPs are pensions established before 1 January 2015 and they use the income test rules applying prior to that date, which were more generous than the current rules.

Moving a grandfathered ABP from an SMSF to a SAF doesn’t change the grandfathering of your pension, so CGT tax is not triggered. This also applies to complying lifetime or life expectancy pensions.

Moving the pension to a SAF is simply viewed as changing the trustee of the fund, not winding it up.

How much do SAFs cost?

Due to the ongoing fees, it’s generally more expensive to have your super savings managed through a SAF compared to using an SMSF structure. However, this can depend on the underlying investments held by your SAF.

Although a SAF may be cost effective if the fund is only investing in shares and managed funds, it’s important to think about whether either a SAF or SMSF is really the right option.

Both these fund structures give members control over the assets held by the fund, but in many cases the same assets are now available more cost effectively through the DIY or Member Direct investment options offered by large retail and industry funds.

Learn more about DIY options vs SMSFs.

Annual fees and costs for a SAF with a range of investment options

The example below shows the combined effect of the ongoing annual fees and costs for a SAF with a fund balance of $600,000. This is an example only – fees and costs will vary depending on the investments selected and your account balance.

Costs		Fund balance of $600,000
Administration fees and costs	Admin fee: ($3,000+[$500,0000.65%]+[$100,0000.45%]) Cash account fee: ($8,000 x 0.60%)	For every $600,000 you have in the super product, you will be charged or have deducted from your investment $6,748 in admin fees and costs
PLUS investment fees and costs	Term deposit: ($100,000 x Nil) Listed investment 1: ($142,000 x Nil) Managed investment 1: ($150,000 x 0.60%) Managed investment 2: ($200,000 x 0.70%)	AND you will be charged or have deducted from your investment $2,300 in investment fees and costs
PLUS transaction costs	Term deposit: ($100,000 x Nil) Listed investment 1: ($142,000 x Nil) Managed investment 1: ($150,000 x 0.06%) Managed investment 2: ($200,000 x 0.08%)	AND you will be charged or have deducted from your investment $250 in transaction costs
EQUALS cost of your SAF		If your balance was $600,000, for that year you’ll be charged fees of $9,298

Notes

Additional fees may apply, such as audit fee ($1,004 – $1,929), APRA levy ($590), BAS fee ($250) and tax return preparation fee ($235), which are fixed regardless of the fund’s value and proportioned between fund member accounts. This is only an example and fees and costs vary depending on the investments selected.

Assumes the estimated investment fees and cost for managed investment 1 is 0.60%pa, estimated investment fee and cost for managed investment 2 is 0.70%pa and no investment fees and costs apply to the listed investment.
Assumes transaction costs for managed investment 1 is 0.06%pa and for managed investment 2 is 0.08%pa.
In the example, contribution of $600,000 is made at the start of the year.
Example does not include brokerage. Brokerage of $29.50 would apply to purchase of the listed investment.

Source: Australian Executor Trustees Small APRA Fund General Reference Guide

SAF vs SMSF: How do they compare?

SAFs and SMSFs are both small super funds focused on a limited number of fund members. Each of these fund structures can have six or fewer members only.

SMSF are established, managed and controlled by their members, who are also the fund trustees. While SAFs operate in a similar way to an SMSF, a professional trustee is responsible for establishing and managing a SAF on your behalf.

A key difference between SMSFs and SAFs is they are regulated by different regulatory bodies – the ATO and APRA respectively.

In the case of fraud or theft, SAF members are able to complain to the Australian Financial Complaints Authority (AFCA) and are eligible for compensation.

SMSFs are ineligible to seek help from AFCA, or to receive compensation.

In addition, SAFs can apply to AFCA for resolution of a dispute or complaint arising over a death benefit paid from the fund, whereas SMSFs don’t have that option. AFCA’s dispute resolution service is free, whereas SMSF members can only use the more expensive court system.

Learn more about making a complaint to AFCA.