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When it comes to BBQ chats about super, talk often revolves around people’s SMSFs and their latest investment strategy.
But SMSFs are not the only option available if you aren’t keen on putting your money into a large, publicly-offered super fund.
Small APRA-regulated funds (SAFs) are an often-overlooked option offering many of the same benefits as an SMSF, but without the heavy administrative burden that goes 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.
But 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.
And unlike retail and industry super funds, SAFs can be quite flexible. For some people they may provide a better alternative than their more popular sibling, the SMSF.
SAFs operate under a different set of rules to SMSFs as their trustee must be a professional licensed trustee company. These companies are 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, professional 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).
What does the licensed trustee do?
The professional licensed trustee in an SAF manages the fund on behalf of the fund members and is responsible for all the compliance and administration of the super fund.
In essence, SAFs are the same as SMSFs but with a professional licensed trustee rather than individual member trustees (or a corporate trustee with fund members as its directors).
The licensed trustee of an SAF 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.
An SAF’s licensed trustee also ensures the death benefits of fund members are paid in accordance with valid death benefit nominations.
Investing with an SAF
Under the super rules, SAFs have the same ability as an SMSF to invest in a wide range of assets.
An 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 an SAF, it’s important to check the investment assets acceptable to the licensed trustee. Different SAF trustees have different rules relating to fund investments.
Generally, if the overall investment portfolio is relatively diversified an SAF may hold other assets such as 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 property), this may not be acceptable in an SAF.
Would an SAF suit me?
SAFs are suitable for many people looking for a super option outside the large retail and industry super funds, but who don’t want the administrative and compliance burden of an SMSF.
These super funds can be suitable for:
- People wanting control over their super without the responsibilities that come with being a fund trustee
- Older people concerned about their ability to run a super fund if they lose mental capacity
- Someone wanting more control of their super investments, but without the responsibility and burden of being a trustee
- Elderly people with their own SMSF looking for an exit strategy other than a large publicly-offered super fund
- Someone disqualified or ineligible from running an SMSF
- People intending to work or move overseas for a lengthy period
- Families caring for an adult child with an intellectual disability
- Blended families.
What are the pros and cons of SAFs?
- 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 an SAF member after being declared bankrupt
- Professional licensed trustee helps avoid common legislative breaches
- Ability to live or work overseas 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
- Potential limits on available investments (such as collectables or large commercial properties) depending on the licensed trustee
- Financial planners are not required to hold and maintain specialist advice qualifications when advising on an 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
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 funds can only have six or fewer members.
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 an SAF on your behalf.
A key difference between SMSFs and SAFs is that 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 from the government’s Superannuation Compensation Scheme. SMSFs are ineligible to seek help from AFCA or receive compensation.
In addition, SAFs can apply to AFCA for resolution of a dispute or complaint arising over 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.