SMSF or SAF: Which super fund option suits you?

Anecdotal evidence in the aftermath of the Trio/Astarra scam, where hundreds of Australians were devastated by the loss of their retirement savings when they deposited them into Trio Capital, suggests more self-managed superannuation fund (SMSF) trustees may be considering converting into small APRA funds (SAFs). This may be for a number of reasons including more security, less responsibility, greater legal recourse and so forth.

An SMSF and an SAF are highly similar except for two pivotal facts – SMSFs are regulated by the Tax Office and SAFs are regulated by the Australian Prudential Regulation Authority (APRA), and SAFs are required to appoint a professional licensed trustee, which holds the ultimate responsibility for all legislative, compliance and administrative decisions made. Both contain their fair share of advantages and disadvantages, some of which we explore below:

Benefits of the SMSF structure

1.  Regulatory

The regulatory regime is common to SMSFs and SAFs, however the administrative burden upon an SMSF may be considered less onerous than for an SAF.

2.  Investments

SMSFs are typically more flexible than an SAF, particularly when it comes to the investments that can be owned. The options for SMSF investments are wide and varied – subject to the SIS Act, the fund’s trust deed and the fund’s investment strategy – but may include direct property, business real property purchased from a related party, shares and unlisted managed funds. SMSF trustees have the ultimate freedom in determining how their retirement savings should be invested. They make the decisions and they choose the fund’s investment strategy as well as its direction. While the options for investment for SAFs are also quite open-ended, a professional trustee is likely to have more stringent investment restrictions than SMSFs when it comes to the approval of assets held.

3.  Costs

SAF members have to pay an independent trustee to run their fund, which adds to running costs and they have higher regulatory supervisory levies of $500, compared to $200 for SMSFs which recently increased from $180, amongst other administrative changes.

4.  Tax reporting obligations

SAFs must meet their tax reporting obligations by October 31 whereas SMSFs can file their annual tax returns later by enlisting the services of a tax agent.

Benefits of the SAF structure

1.  Compliance risk

An 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.

2.  Administration

The 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 the administration of their fund – although they can enlist the services of an adviser.

3.  Protection

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 for losses they believe are due to misconduct or inappropriate action.

4.  Travel

SAFs are more flexible when their members go overseas for an indefinite period compared to SMSFs which are strictly regulated in that circumstance. Trustees in 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 (see SMSFs: How to travel and keep your fund compliant in our June newsletter for more information on that). 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.

5.  Disqualified persons

Investors are not allowed to be trustees of an SMSF 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 investors from taking on positions of responsibility in the superannuation arena 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.

6.  Family members

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.

7.  Responsibility

Older investors 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 – and to acquire a similarly broad range of assets and 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.

The table below summarises the pros and cons of each setup:

Self-managed super fund (SMSF)

Small APRA fund (SAF)

Your role

You and up to three other members are trustees of your SMSF and have overall responsibility for legislative, compliance and administrative decisions of the fund.You and up to three others are members of your SAF. A professional trustee has overall responsibility for the legislative, compliance and administrative decisions of the fund.

Key benefits

Flexibility to create your own investment strategy, direction and ultimate freedom in determining how retirement savings are used.Peace of mind, especially if you’re older, as the professional trustee oversees all aspects of your SAF to ensure it remains compliant.
Less tightly governed than SAFs with a less onerous compliance regime.Less compliance risk as the liability is borne by the professional trustee.
Reasonable running costs.Allows an otherwise disqualified person to be a member of an SAF.
SMSFs can file their annual tax returns later than SAFs, as long as they enlist the help of a tax agent.More flexible if trustees decide to travel indefinitely.

Suitable if you….

Want to have full control of your super investmentsWant a high level of control over your investment decisions.
Have the time, resources and ability to manage your fund’s legislative, compliance and administrative decisions.Want to manage your own super without the added responsibility of being a liable trustee.
Are willing to accept the legal responsibilities of being a trustee.Are an existing SMSF trustee who no longer wants to or is unable to undertake trustee responsibilities due to travel or old age.
Want to manage your own super with minimal costs.Are a disqualified person.

It appears that an SMSF is ideal for people who want to be fully in control of their investment decisions and retirement savings while an SAF is perfect 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 and it is important to note that trustees who switch from an SMSF to an SAF do not incur capital gains tax as they have to retire as trustees themselves and appoint a professional licensed trustee to govern their SAF. Consult this office for more information if you wish to switch fund structures.