Small APRA Funds: their role in an SMSF
A self-managed super fund (SMSF) is one of two main options open to Australian retail investors to take control of the management of their retirement savings.
Another option is a Small APRA fund (SAF). A SAF operates in a very similar way to an SMSF with one major difference: a professional trustee runs the structure, rather than it being run by the fund’s members. This essentially means SMSF members transfer the responsibility for the fund’s regulatory compliance to a professional – for a fee.
Both SMSFs and SAFs can play a role in an investor’s retirement savings plan. In some cases an SMSF can hold a SAF within it.
Damian Liddell, a financial adviser with Browell’s Financial Solutions, explains there may be some natural points in an SMSF member’s life that lend themselves to exploring SAFs as an investment option.
“SMSF members might consider using a SAF if they are starting to lose their capacity to perform the role of a trustee. In other circumstances the fund members may simply not want the responsibility of running the fund themselves anymore, but they may still want to retain control of their assets,” he explains.
According to Liddell, moving overseas or becoming a disqualified person for trustee purposes are others reasons for considering a SAF over an SMSF.
“You may also use a SAF if the fund members have complex estate planning needs, for example if you are dealing with blended families or with beneficiaries who have special needs,” he explains.
When these triggers become apparent, it’s useful to start to compare whether the SMSF should move to a SAF structure. Another option might be to wind up the SMSF and move the assets to a retail or industry fund.
There is a range of factors to consider if you are thinking about starting a SAF.
The first is the control and options you would like to have with regards to your investments. For example, if your SMSF holds direct property that you don’t want to liquidate, then moving your assets to a large retail or industry fund may not be the best option.
Fees are the other consideration. Before taking any steps to close an SMSF in favour of a SAF it’s first essential to work out initial and ongoing costs of both options, including wind up costs, the cost of professional trustee services and investment costs.
Management fees, as well as regulatory and audit fees, any APRA levies and charges to prepare BAS and tax returns are other costs.
Rhiannon Kanoniuk, director and practice principal of financial advice firm Pekada says SAFs are relatively unknown and rarely used, in her experience.
“That being said, they do have a place. In my mind they are likely to be used by someone who already has an SMSF and, rather than rolling the funds over to a retail or industry super fund, they go into a SAF,” says Kanoniuk.
“We might see someone start up a SAF when the members of an SMSF are ageing, of if they no longer have the mental capacity or the inclination to carry out their trustee responsibilities,” says Kanoniuk.
Another example when a SAF may be appropriate is where SMSF trustees decide to move overseas for more than two years.
“In this instance they could breach the central management and control test that applies to SMSFs, leading to the structure losing its complying status and tax concessions. SAFs would therefore be an ideal solution to this issue,” she says.
Says Kanoniuk: “Moving from an SMSF to a SAF wouldn’t trigger a capital gains tax event and if the clients had a grandfathered income stream, it would remain so. Going to a SAF is essentially just a change of trustee.”
While SAFs have their place in some investors’ portfolios, it’s essential to weigh up the pros and cons of switching from an SMSF to a SAF.
They may be suitable for investors moving abroad or whose capacity to run the fund is diminished.
But SMSFs’ ability to offer more flexibility when it comes to managing investments makes them a more attractive option for most people who want greater control over their investments and who still have the inclination and capacity to do so.