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

Noel's share winners and loser plus budget reality check

Among the share success stories is a poor personal experience as Telstra's service needs improving. Plus why the new budget announcements on downsizing and buying a home don't deserve the super hype.

Grantham interview on the coming day of reckoning

Jeremy Grantham has seen it all before, with bubbles every 15 years or so. The higher you go, the longer and greater the fall. You can have a high-priced asset or a high-yielding asset, but not both at the same time.

Five stock recoveries not hanging on COVID predictions

The focus on predicting the recovery from the pandemic is the wrong emphasis. Better to identify great companies benefitting from market changes over a three- to five-year horizon with or without COVID.

BHP v Rio v Fortescue: it's all about the iron ore price

Don’t look at an earnings forecast or a DCF valuation or a broker target price for a mining company. Share price forecasts are only as good as the commodity price assumptions they are based on, and they are a guess.

Blink and you missed a seismic shift in these stocks

Blink and it happened. If announcements in this sector were made by a producer of iron ore, gas, copper or some new tech, the news would have been splashed across the front pages. Have we witnessed a major change?

Peak to peak, which LIC managers performed during COVID?

A comprehensive review of dozens of LICs shows how they performed in the crucial 'peak to peak' of COVID. This 14 months tested the mettle and strategies of a sector often under fire, with many strong results.

Latest Updates

Superannuation

Jane Hume shakes up super, but what will it achieve?

The Government calls 'Your Future, Your Super' the most significant reforms since the start of compulsory super. Stapling has benefits and we should remove poor funds, but performance comparisons are difficult.

Superannuation

Launch of the 'Wealth of Experience' podcast

Welcome to the first episode of our fortnightly podcast, Wealth of Experience, with Graham Hand and Peter Warnes. They have a combined 99 years in markets and they will share this experience to help build your wealth.

Investment strategies

How inflation impacts different types of investments

A comprehensive study of the impact of inflation on returns from different assets over the past 120 years. The high returns in recent years are due to low inflation and falling rates but this ‘sweet spot’ is ending.

Investment strategies

Where will investment returns come from in 2021?

There are only three sources of returns when investing in companies. Whether an investment delivers on dividends, earnings or valuation expansion determines performance, and the contribution of each varies over time.

Investment strategies

Portfolio composition and what you find under the bonnet

Powerful structural themes such as technology disruption and demographic changes may disguise what is driving company success. Watch these broad categories as they may not apply in ways you expect.

Investment strategies

When rates rise, it's time to look for new players on the team

Long duration assets such as government bonds and property have benefitted from falling interest rates, but a turn is coming. It's time to find assets that may benefit from rising rates, such as private debt.

Investment strategies

How are high net worths investing and thinking now?

Citi research delves into how high net worth investors are feeling in the current market, and how they are investing during the drama of the pandemic. There is plenty of optimism and a willingness to stay invested.

Sponsors

Alliances

© 2021 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 ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). 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.

Website Development by Master Publisher.