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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.
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.
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.
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.
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 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
- 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
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.
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.
|Fund balance of $600,000
|Administration fees and costs
|Admin fee: ($3,000+[$500,000*0.65%]+[$100,000*0.45%]) 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
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
cost of your SAF
|If your balance was $600,000, for that year you’ll be charged fees of $9,298
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.