(03) 9020 2905PORTFOLIO POINT: They’re not a big part of the DIY spectrum, but SAFs have some important advantages over SMSFs … and could save your super skin.
Those who are deeply immersed in their world of self-managed super funds are almost inevitably happy with their choice.
They have, as far as super goes, almost the ultimate freedom in determining their retirement future. They make the decisions, they choose where they take this baby and they can often (but not always) save themselves a bundle in fees and charges in the process.
And while most SMSF trustees have probably heard of their tiny cousins, Small APRA Funds (SAFs), they probably know little about them. Or, perhaps, when they might actually need one to help them out of a tight spot.
SAFs share a great number of similarities to SMSFs. But they are, importantly, different in a number of ways also.
SAFs – the basics
They’re not in abundance, which suggests that they’re either not suitable to many, or people don’t appreciate their value. At last count, there were just 3521 SAFs (which was falling), less than 0.8% of the nearly 450,000 SMSFs in existence (which are mushrooming).
SAFs, like SMSFs, are funds of fewer than five members. They have a different regulator – where SMSFs have the Australian Tax Office, SAFs have the Australian Prudential Regulation Authority.
The biggest difference between SAFs and SMSFs is the inclusion of an independent trustee, which holds the ultimate responsibility for making decisions for the fund.
This alone would be enough to turn most SMSF proponents off a SAF. But SAF trustees do not necessarily have to act independently like the trustees of major funds. They are open to being directed into which investments members would like to hold, so long as it fits with the parameters set by the trustee (therefore investigation into what the trustee will or won’t invest in becomes highly important).
Obviously, those independent trustees need to be paid, which adds to the cost of running a SAF.
The big advantages
Some of the restrictive rules that apply to SMSFs do not apply to SAFs.
If you’re heading into international waters, you could face trouble with a SMSF, where a SAF could be your rescue boat.
This is because SMSFs can get into trouble over the “central management and control test”. This essentially means that SMSF members need to be residents of Australia, or at least the members who have the majority of assets in the fund need to be residents, or the SMSF might be declared non-compliant. The independent SAF trustees must, by definition, be Australian residents, so SMSFs who are intending on heading overseas for extended, or unknown, periods might wish to consider converting their SMSF to a SAF.
A SAF can have offshore members, where a SMSF whose members move overseas run the risk of becoming non-compliant (and therefore having the fund’s assets taxed at up to 46.5%).
Therefore, those members who are considering international postings and are worried about this aspect of their SMSF, could consider switching their SMSF to a SAF while they take that posting, or overseas opportunity.
Another rule surrounds the exclusion of “disqualified persons” being trustees of SMSFs. Disqualified persons are, in the main, bankrupts and those who have found themselves on the wrong side of insolvency laws or other indiscretions that might stop them acting as trustees. Because the SAF trustee is independent, the inclusion of financially challenged or penalised members can be accepted (as they can in any other non-SMSF funds where the trustee is independent).
With a SMSF, a member may not be an employee of another member, unless they are family. A SAF, however, can have a member/trustee who is an employee of another member. There will have been SMSF-like investment opportunities that will have been passed up because of this restriction on SMSFs, where SAFs might have allowed those opportunities.
It is possible to switch from SMSF to SAF and back again, though there are some costs involved and a few hoops to jump through.
SAF members can also resort to the Superannuation Complaints Tribunal, in the event that the trustee has wronged members. SMSFs, where all members must be trustees and all trustees be members, aren’t (or shouldn’t) be protected from their own actions.
The downsides
Reserving strategies can be a core advantage of SMSFs (a topic I will return to in future articles). Reserves can be used to maintain super benefits for longer, for intergenerational wealth transfer, for smoothing contributions and tax planning strategies.
There is little suggestion that SAF trustees are prepared to, or do, use reserving strategies for the benefit of fund members.
SAFs have higher regulatory supervisory levies of $500, versus $180 for SMSFs.
SAFs must meet their tax reporting obligations by October 31, where SMSFs, by going through a tax agent, can go much later.
While the death of a member in a SMSF can cause administrative headaches for two-member funds, which generally need to switch to an single trustee fund (and therefore corporate trustee) before a death benefit is paid, SAFs can avoid this issue.
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The declining numbers of SAFs suggest that their shortcomings (including loss of control and costs) are a little too restrictive for most of those who seek the benefits of small funds.
But don’t forget SAFs. There are situations where they are more appropriate, are the only thing that is appropriate, than a SMSF.
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The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are advised to consult your financial adviser.
Bruce Brammall is director of Castellan Financial Consulting and the author of Debt Man Walking.