Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 171

The other self managed super funds

Australians are living longer than ever before, and many SMSF members are understandably becoming increasingly concerned about their fund’s management should they no longer be able to take care of it themselves.

By 2050, the number of people with dementia is predicted to be almost 900,000, according to the Australian Bureau of Statistics, and people are now questioning how they would manage their SMSF should they also succumb to the disease or to Alzheimer’s.

A small APRA fund (SAF) may be an appropriate alternative for SMSF members concerned about losing mental capacity or for elderly members who no longer have the capacity or desire for trustee responsibilities.

A SAF is essentially an SMSF with a professional licensed trustee. It provides all of the legislative flexibility available to an SMSF, but without the associated trustee responsibilities and the risk of compliance breaches. Like an SMSF, SAFs are restricted to four members.

Trusteeship benefits

An attractive feature of a SAF is that the trusteeship of the fund is performed by a specialist trustee company and is not related to membership of the fund. In an SMSF, on the other hand, all members must be trustees which can create difficulties if a member becomes ineligible.

A person who lacks mental capacity is unable to be an SMSF trustee. In addition, if a person becomes an undischarged bankrupt or is convicted of an offence involving dishonesty, they are classified as a disqualified person and are also unable to be a trustee. However, there are no legal issues with a disqualified person being a member of a SAF.

If an SMSF member becomes a non-resident, it can be difficult for the SMSF to retain its eligibility for concessional tax treatment. The central management and control of super funds is required to be performed in Australia. However, in a SAF, the professional trustee is an Australian-based company so the central management and control is performed in Australia, even if the member gives investment directions from overseas.

Compliance risk

In an SMSF, the compliance risk is borne by the directors of the trustee company or the individual trustees. The ability to effectively manage the fund’s compliance and investments requires skill, expertise and time.

While many SMSF trustees perform their compliance responsibilities soundly, often with the aid of professional advisers, this is often seen as the ‘boring’ part of running the fund, and the price paid for the investment flexibility and control that comes with an SMSF.

In an SAF though, the compliance risk is borne by a professional licensed trustee whose core business is to provide trustee and superannuation services. The licensed trustee is expected to be skilled and experienced and the common breaches of legislative requirements for SMSFs occur rarely, if ever, in SAFs. In the event that a compliance breach does occur, the professional trustee is responsible, not the members.

In the current environment of strict SMSF administration penalties ($10,800 for the most common compliance breaches) this is an attractive advantage to being a SAF member.

Administration

The administration of SMSFs can vary dramatically between funds, and there are often time delays that result in up-to-date fund information not being provided to members and their advisers.

For example, determining accurate account balances and portfolio valuations as at 30 June each year is often not possible until the annual accounts for the SMSF have been prepared (often in May of the following year).

It is also common for the production of accounts to rely heavily on the SMSF trustee providing timely and accurate information. Many trustees find their funds’ administration and record-keeping requirements even more boring and time-consuming than the compliance responsibilities.

The administration of SAFs is performed by a professional organisation appointed and controlled by the licensed trustee. The administration organisation records all fund transactions including collection of fund income, payment of expenses and asset purchases and sales.

SAF record keeping is timely and accurate because a licensed trustee controls custody of all the assets and receives all the information and transactions directly from external parties. In addition, a majority of SAF members and their professional advisers have 24/7 online access to account information including daily portfolio valuations.

It is not possible for SAF members to choose an auditor, accountant, trust deed solicitor or investment platform. All service providers are appointed by the licenced trustee.  However, all investment transactions are placed via a licenced financial planner or broker chosen by the member.

Investments

Like SMSFs, SAFs are able to invest in property and collectables and may acquire business real property from related parties. Among this wide range, SAFs will require a diversified investment portfolio. The fund members make all the investment decisions and direct the trustee in this regard. However, members are required to remain within the investment strategy, or change their strategy if their circumstances change. The trustee does not make decisions to invest in any particular asset or asset class.

Fees

As SAFs are administered by a professional trustee, there are management fees paid to the trustee which comprise of a tiered percentage fee based on the fund’s assets plus a fixed cost fee to cover statutory expenses. These management fees are in addition to advice fees paid to a professional adviser. The annual tiered management fee is subject to a maximum of $7,500.

The fees charged by Australian Executor Trustees for managing a SAF are outlined below:

A sample of costs for various fund balances is provided below:

SAF-table3

On a $1,000,000 fund balance the trustee management fee is calculated as:

  • $250,000 x 1.06% + $500,000 x 0.33% + $250,000 x 0.22%
  • $2,650 + $1,650 + $550 = $4,850

Conclusion

A SAF may be a useful alternative for members who want the flexibility of an SMSF without the compliance and administrative burden of being a trustee. They may also suit those ineligible to be a trustee such as overseas residents, bankrupt, or disqualified people.

 

Julie Steed is Senior Technical Services Manager at Australian Executor Trustees. This article is general information and does not consider the circumstances of any individual.

RELATED ARTICLES

When SMSF members head for the exit

Four common technical questions on SMSFs and super reform

Ructions in the SMSF market

banner

Most viewed in recent weeks

Who's next? Discounts on LICs force managers to pivot

The boards and managers of six high-profile LICs, frustrated by their shares trading at large discounts to asset value, have embarked on radical strategies to fix the problems. Will they work?

Four simple things to do right now

Markets have recovered in the last six months but most investors remain nervous about the economic outlook. Morningstar analysts provide four quick tips on how to navigate this uncertainty.

Welcome to Firstlinks Edition 374

Suddenly, it's the middle of September and we don't hear much about 'snap back' anymore. Now we have 'wind backs' and 'road maps'. Six months ago, I was flying back from Antarctica after two weeks aboard the ill-fated Greg Mortimer cruise ship, and then the world changed. So it's time to take your temperature again. Our survey checks your reaction to recent policies and your COVID-19 responses.

  • 9 September 2020

Reporting season winners and losers in listed property trusts

Many property trust results are better than expected, with the A-REIT sector on a dividend yield of 4.8%. But there's a wide variation by sector and the ability of tenants to pay the rent.

Have stock markets become a giant Ponzi scheme?

A global financial casino has been created where investors ignore realistic valuations in the low growth, high-risk environment. At some point, analysis of fundamental value will be rewarded.

How the age pension helps retirees cope with losses

It's often overlooked how wealthier couples can fall back on the age pension if a market loss hits their portfolio. The reassurance is never greater than in a financial (and now epidemic) crisis.

Latest Updates

Weekly Editorial

Welcome to Firstlinks Edition 376

The US tech index, the NASDAQ, peaked on 2 September 2020 at 12,058 and three weeks later closed at 10,632. On the same days, Apple hit US$137.98 and then fell to US$107.12. These falls of over 10% and 20% seem high but both were simply returning to their early August levels. It's hardly a rout when a month's gains are given back. The bigger issue is whether such stock corrections will scare off the retail 'Robinhood' traders.

  • 24 September 2020
  • 2
Interviews

Interview on new technologies with more potential to grow

For many global tech companies, COVID has boosted their revenues and pushed share prices to all-time highs. We are on the cusp of amazing technical advances and there are plenty of new opportunities.

Shares

Five reasons why Tesla is the everything bubble

As fewer professionals actively research the merits of a company’s prospects, stocks become disproportionately driven by capital flows. Prices disconnect from fundamentals and there's no better example than Tesla.

Retirement

Three retirement checks for when you have enough

Not every retiree needs to gun for higher returns, but a conservative portfolio can court its own risks, especially with bond rates so low. But some retirees prefer to settle for a lower income.

Shares

Hide and seek: the FX impact on global equity investments

As more Australians tilt their investments to global equities, they often overlook the exchange rate risk and fees. The move from US57 cents to US73 cents in six months shows the unhedged impact.

Economy

When America sneezes, the world catches a ...

The recovery from COVID-19 is looking more like a K-shape, with some companies doing well while others struggle. The pandemic seems more akin to a black swan, exogenous shock than a structural downturn.

Retirement

How the age pension helps retirees cope with losses

It's often overlooked how wealthier couples can fall back on the age pension if a market loss hits their portfolio. The reassurance is never greater than in a financial (and now epidemic) crisis.

Sponsors

Alliances

© 2020 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use.
Any general advice or class service prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, has been prepared by without reference to your objectives, financial situation or needs. Refer to our Financial Services Guide (FSG) for more information. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.