Can you manage your own super without drowning in paperwork?
Anyone with a self-managed superannuation fund (SMSF) knows they're an extremely flexible vehicle that enables the effective accumulation and management of retirement savings.
For many, the big drawback is the admin burden – including, but not limited to:
- Lodging annual returns with the Tax Office
- Preparing fund accounts
- Arranging fund audits
- Managing trustee meetings.
While much of this burden can be outsourced to expert providers, the ultimate responsibility rests with the trustee. This burden of responsibility is one reason more people are turning to an alternative structure – the small APRA fund (SAF).
A SAF is a super fund with a structure similar to an SMSF, ie a maximum of four members. The crucial difference is that the trustee responsibilities are undertaken by an APRA-licensed trustee – a professional trustee company – rather than members. The trustee takes on the day-to-day burden of running the fund – all risk management, legislative responsibilities and administration are provided. Naturally, you pay a price for those services – but for those who prize their time and peace of mind, it can be worth it.
Let’s have a look at some of the other characteristics of the SAF structure.
One interesting difference is that SAFs are regulated by APRA (The Australian Prudential Regulation Authority) whereas SMSFs are regulated by the Tax Office (though the same super legislation applies). As a result, SAF members, unlike SMSF members, have access to the Superannuation Complaints Tribunal and the Superannuation Compensation Scheme (which compensates super funds for losses suffered from fraud or theft).
In the unlikely event that a SAF breaches super law, any APRA penalty may be mitigated by the "culpability test" which protects members not involved in the decision-making that led to the breach. This concession doesn’t often apply to SMSFs as all members are trustees who make the decisions – or at least should be.
Enhanced flexibility around member capability
Because members don’t automatically assume trustee responsibilities, SAFs offer some estate planning opportunities generally not available with a SMSF. They can, for example, suit families wanting to provide an income stream for a relative with an intellectual disability.
SAFs may also be appropriate for members who are concerned about possible diminished mental capacity later in life, or ageing members who no longer have the capacity for trustee responsibilities.
A "disqualified person", such as a bankrupt, who cannot be a trustee/member of a SMSF can be a member of a SAF and thus essentially have their own fund.
An SMSF trustee's geographical location is relevant in meeting the "central management and control test" necessary for obtaining an SMSF’s tax concessions – so residency may become an issue for SMSF trustees living offshore.
SAFs easily meet the residency test as all trustees are companies incorporated in Australia. (Note that whether it's an SAF or SMSF, non-resident members cannot contribute to the fund unless contributing resident members hold more than 50 per cent of the fund's assets).
Moving doesn’t mean losing
People who find that their SMSF no longer meets their needs often feel trapped due to the capital gains tax (CGT) and/or social security consequences of moving funds.
Moving from a SMSF to a "retail" or industry fund is a CGT event. Accordingly, any capital gain will be taxable at that time and any CGT losses will be lost forever as they cannot be rolled over.
Moving from an SMSF to a SAF, however, does not trigger a CGT event. Instead, the existing trustees retire and a professional licensed trustee is appointed. The fund – the tax-paying entity – continues uninterrupted.
In addition, an account-based pension that is "grandfathered" under the old social security rules continues to be treated that way when you move from a SMSF to a SAF. If you have a "grandfathered" account-based pension and you change income streams then the current deeming rules – which came into effect on January 1, 2015 – apply.
Maintaining a "grandfathered" account-based pension can be critical for both aged pensioners and self-funded retirees. Retaining the old Centrelink/DVA income test treatment is important for people who do not want their account-based pensions deemed. For pensioners, this means that some/all of their account-based pension payments do not count for the income test which may mean higher entitlements than if deeming applied. And for self-funded retirees – those more likely to have a DIY fund – maintaining a "grandfathered" account-based pension may be crucial in keeping the Commonwealth Seniors Health Card, as no pension income is assessed against the card's income test.
Same income stream
Moving from a SMSF to a SAF may also mean keeping your fund's investments (for example, direct property) which you couldn't do if you moved to a retail or industry fund. Generally, the investment universe is the same for both SAFs and SMSFs, but there will be specific restrictions depending on the trustee. SAFs are more limited in terms of investment options due to trustee requirements. But you do get access to wholesale managed funds.
So if you like the idea of DIY super without the hassle, an SAF may be the solution. They reduce compliance risk, offer some valuable estate planning flexibility and may maintain your tax and Centrelink positions if you’re coming from a SMSF. While there are trade-offs around investment options and the cost of trustee services, an SAF can be a genuine SMSF alternative. Just make sure you get expert personal advice about all the issues.
Colin Lewis is head of strategic advice at Perpetual Private.
This is an edited version of an article that first appeared in the Australian Financial Review Weekend on 7 November 2015.
This analysis has been prepared by Perpetual Trustee Company Limited (PTCo), ABN 42 000 001 007, AFSL 236643. It is general information and is not intended to provide you with financial advice. The views expressed in the article are the opinions of the author at the time of writing and do not constitute a recommendation to act. Any information referenced in the article is believed to be accurate at the time of compilation and is provided by Perpetual in good faith. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information.