On the home page of this blog I outline the Benefits of a Self Managed Super Fund – SMSF in some detail. Well, when looking at any investment structure I always like to assess the alternative options and eventual exit strategies. While many of you will know of the Retail and Industry superannuation fund options, you may not be as familiar with a close relation to the SMSF known as a Small APRA fund (SAF). So let’s look at little closer at this option.

What is an Small APRA Fund (SAF)?

An SAF is similar to an SMSF but instead of the client(s) being the trustee(s), a professional licensed trustee is responsible for all of the administrative,  compliance and legislative responsibilities of running the superannuation fund.

SAFs offer an alternative for clients looking for the increased flexibility of an SMSF but without the burden of being a trustee and the associated compliance risk. They are also an effective solution for clients who are non-residents or bankrupt and therefore unable to be trustees of an SMSF.

I always warn new clients that if your career or business relies on you being a director then you must take the decision to set up an SMSF very carefully and be ready to put the time and effort in or choose SMSF specialist advisors to ensure your fund remains compliant so that you don’t lose your ability to be a director of any company because of breaching SMSF legislation.

SAFs provide all of the legislative advantages afforded to SMSFs, without the risks associated with breaching legislative compliance requirements.

Let be very honest up front and say this is not a suitable option for small balances as you are incurring an extra layer of trustee fees. However for those with larger balances the option can be very cost-effective especially when you consider the ability to relieve yourself of the trustee responsibilities.

Main benefits of the SAF structure

1. Offloading the Compliance risk

The main advantage of running an SAF is that the compliance risk is borne by the professional licensed trustee whose core responsibility is the provision of trustee services. If an SAF is in breach of the rules, the members of the fund will not be liable for the compliance mistakes of the professional trustee. In an SMSF, all members must be a trustee or director of a corporate trustee which means all members bear the compliance liability. You cannot claim your spouse was solely responsible for running the fund. One case clearly shows the risk of being a “silent trustee”where the verdict found the former wife, in her role as a trustee of the fund, was personally liable when it became non-complying after her former husband stripped out most of the assets and headed overseas. See Shail Superannuation Fund and Commissioner of Tax [2011] AATA 940

2. Administration of the fund

A professional licensed trustee in charge of an SAF typically appoints professional organisations to carry out the administration of the fund or is skilled and experienced enough to avoid common breaches of legislative requirements. As the professional licensed trustee administers all information and transactions, record keeping is typically timely and accurate. In SMSFs, the trustees are typically responsible for collating all the documentation and reports so their chosen administration service can prepare the financials of their fund (Not so hard as it sounds nowadays but when your busy?…paperwork suffers)

3. Travelling overseas for extended periods

SAFs are more flexible for people who may go overseas for an indefinite period compared to SMSFs which are strictly regulated in that circumstance. Members of an SMSF who relocate for an extended period of time have to fulfil two requirements – the central management and control of an SMSF needs to be in Australia, and the active member test needs to be fulfilled . If any of these requirements are breached, the SMSF loses its residency status, is deemed non-compliant and will face exorbitant penalty taxes of up to 46.5%. An SAF however can have offshore members – as long as they are Australian residents for tax purposes.

4. Protection and access to Superannuation Complaints Tribunal

In the case of fraudulent conduct or theft, SAFs have more readily available redress options including a grant of financial assistance as statutory compensation and access to the Superannuation Complaints Tribunal which deals with complaints about the decisions and conduct of APRA-regulated fund trustees and other decision makers. Conversely, no compensation scheme exists for SMSFs and they instead have to rely on courts to resolve disputes or look to the Corporations Law to take action against a financial adviser, accountant or administrator for losses they believe are due to misconduct, negligence or inappropriate action.

5. Disqualified persons – Bankruptcy or Criminal record

Individuals are not allowed to be trustees of an SMSF or directors of a corporate trustee if they have committed a crime involving dishonesty such as fraud, theft or embezzlement or if they have been declared bankrupt. The Tax Office will ban individuals from taking on positions of responsibility  in an SMSF if it believes the person has breached the superannuation laws either very seriously or persistently or it believes the person is not a fit or proper person and hence should be disqualified. There are no issues with a disqualified person becoming a member of an SAF as they are not required to fill the role of trustee and it is in fact an often preferred solution for those with an SMSF who find themselves in that unenviable position with assets that aren’t liquid.

6. Responsibility concerns due to ageing or onset of mental illness

Some older people may prefer to use an SAF because they have reached an age where they are no longer able, or may not want to, make effective management and operational decisions. SAFs still allow investors to be in charge of the asset allocation – subject to trustee approval (but they are becoming a lot more flexible) – and to maintain or acquire a similarly broad range of assets and avail of strategies available to SMSF investors. Problems often arise in an SMSF when an older trustee loses the capacity to function and participate in the fund’s inner workings whereas in an SAF, the professional licensed trustee will continue to manage the fund for the benefit of its members.

7. Estate planning

There are a number of estate planning scenarios  where an SAF being a better alternative to an SMSF. In an SMSF, the death of a fund trustee changes the composition of the trustees and may provide potential for disputes especially in blended families. In an SAF, the licensed trustee is an independent and unbiased party with no family relationship issues that we often see arise with estates. In an SMSF, it is possible to try to include safeguards into the trust documentation; however, if one of several feuding beneficiaries has the cheque book, it may take the remaining beneficiaries considerable time and expense to track down the person and the money. As one colleague said:

“a remaining trustee with a cheque book can do a lot of damage to an SMSF balance while family fight for control in the courts”

8. Taking care of vulnerable beneficiaries

SAFs can provide very tax effective death benefit income streams to intellectually disabled adult children. The hurdle of the person with a disability or their legal personal representative needing to be a trustee is removed because, unlike an SMSF, an SAF has a professional trustee. The use of the professional trustee also ensures that ongoing services can continue to be provided to a disabled person is over 18 and once the parents have died or lost capacity. There is the ability to pay a death benefit income stream to the disabled child and then have any capital remaining return to the parent’s estate on death.

9. Employer – Employee Fund

In an SMSF, a trustee cannot be an employee of another member – unless they are family. In an SAF however, a member can be an employee of another member. Further, since SAFs have a professional licensed trustee, the related-party issues that crop up in an SMSF are not an issue in an SAF.

In summary while an SMSF may be ideal for people who want to be fully in control of their investment decisions and retirement savings, an SAF is ideal for those who would like to actively participate in investment decisions but retain a low-level of compliance and legislative responsibilities. It is possible to switch from an SMSF to an SAF or vice versa without incurring capital gains tax as all they have to do is retire as trustees themselves and appoint a professional licensed trustee to govern their SAF.

So why may a SAF be a better option than a Retail or Industry Fund?

• Moving to a SAF is Not a CGT event whereas it would be if you moved to a retail or industry fund
• Likely to be able to keep assets such as direct shares, bullion, collectables and residential and commercial property subject to rules.
• The member can still  direct investments within the approved list
• Member directed death benefit nominations are still possible and in fact often more achievable as the trustee can follow your wishes.
• No issues with single member funds
• Retains privacy for those in high-profile positions

I would like to acknowledge that much of my information in this area has been gathered from articles and presentations by Julie Steed of Australian Executor Trustees who are very experienced in running SAFs and working as a team with clients and their financial planners.

I hope this guidance has been helpful and please comment below. Feedback always appreciated. Please reblog, retweet, like on Facebook etc to make sure we get the news out there. As always please contact me if you want additional information on switching fund structures.We have offices in Castle Hill and Windsor but can meet clients anywhere in Sydney or via Skype. Just click the Schedule Now button up on the left to find the appointment options.

Liam Shorte B.Bus SSA™ AFP

Financial Planner & SMSF Specialist Advisor™

Tel: 02　98941844, Mobile: 0413 936 299

PO Box 6002 BHBC, Baulkham Hills NSW 2153

5/15 Terminus St. Castle Hill NSW 2154

Corporate Authorised Representative of Magnitude Group Pty Ltd ABN 54 086 266 202, AFSL 221557

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.