The lowdown on SAFs

PORTFOLIO POINT: They’re not a big part of the DIY spectrum, but SAFs have some important advantages over SMSFs.

Those who are deeply immersed in their world of self-managed super funds are almost inevitably happy with their choice.

They have, as far as super goes, almost the ultimate freedom in determining their retirement future. They make the decisions, they can choose the fund’s direction and they can often (but not always) save themselves a bundle in fees and charges in the process.

And while most SMSF trustees have probably heard of their tiny cousins, Small APRA Funds (SAFs), they probably know little about them, or how they can be used to help trustees out of a tight spot.

SAFs share a great number of similarities to SMSFs. But they are, importantly, different in a number of ways as well.

SAFs – the basics

SAFs are not widely used, which suggests they are either unsuitable for many people, or that their value is not appreciated. At last count, there were just 3521 SAFs (and falling), less than 0.8% of the nearly 450,000 SMSFs in existence (a figure which is climbing rapidly).

SAFs, like SMSFs, are funds of fewer than five members. However, they have a different regulator – where SMSFs have the Australian Taxation Office, SAFs have the Australian Prudential Regulation Authority.

The biggest difference between SAFs and SMSFs is the inclusion of an independent trustee, which holds the ultimate responsibility for making decisions for the fund.

This alone would be enough to turn most SMSF proponents off a SAF. But SAF trustees do not necessarily have to act independently, as the trustees of major funds do. They are open to being directed into those investments that members would like to hold, provided the investments fit with the parameters set by the trustee. Investigation into what the trustee will or won’t invest in therefore becomes highly important.

Obviously, independent trustees need to be paid, which adds to the cost of running a SAF.

The big advantages

Some of the restrictive rules that apply to SMSFs do not apply to SAFs.

If you’re heading into international waters, you could face trouble with an SMSF, where a SAF could be your rescue boat.

This is because SMSFs can get into trouble over the 'central management and control test’. This essentially means that SMSF members need to be residents of Australia, or at least the members who have the majority of assets in the fund need to be residents. An SMSF whose members move overseas runs the risk of becoming non-compliant (and therefore having its assets taxed at up to 46.5%). A SAF, however, can have offshore members. Independent SAF trustees must, by definition, be Australian residents, so SMSF members who are intending on heading overseas for an extended period may wish to convert to a SAF.

Another rule surrounds the exclusion of “disqualified persons” being trustees of SMSFs. Disqualified persons are, in the main, bankrupts and those who have found themselves on the wrong side of insolvency laws or other indiscretions that might stop them acting as trustees. Because the SAF trustee is independent, the inclusion of financially challenged or penalised members can be accepted (as they can in any other non-SMSF funds where the trustee is independent).

With an SMSF, a member may not be an employee of another member, unless they are family. A SAF, however, can have a member/trustee who is an employee of another member. There will have been SMSF-like investment opportunities that will have been passed up because of this restriction on SMSFs, where SAFs might have been an option.

It is possible to switch from an SMSF to SAF and back again, though there are some costs involved and a few hoops to jump through.

SAF members can also resort to the Superannuation Complaints Tribunal, in the event that the trustee has wronged members. SMSFs, where all members must be trustees and all trustees be members, aren’t (or shouldn’t) be protected from their own actions.

The downsides

Reserving strategies can be a core advantage of SMSFs (a topic I will return to in future columns). Reserves can be used to maintain super benefits for longer, for intergenerational wealth transfer, for smoothing contributions and tax planning strategies.

There is little suggestion that SAF trustees are prepared to, or do, use reserving strategies for the benefit of fund members.

SAFs have higher regulatory supervisory levies of $500, versus $180 for SMSFs.

SAFs must meet their tax reporting obligations by October 31, where SMSFs, by going through a tax agent, can file much later.

While the death of a member in an SMSF can cause administrative headaches for two-member funds, which generally need to switch to an single trustee fund (and therefore corporate trustee) before a death benefit is paid, SAFs can avoid this issue.

The declining numbers of SAFs suggests that their shortcomings (including loss of control and costs) are a little too restrictive for most of those who seek the benefits of small funds.

But don’t forget SAFs – there are situations where they are more appropriate than an SMSF.

Finding good strategic advice is the hardest part of running an SMSF, according to a study by SMSF Professionals Association of Australia (SPAA) and Russell Investments. The report says that 37.4% of respondents find it “very challenging” to locate quality professional advice, with investment advice being the most sought after, followed by tax, compliance and estate planning guidance (respectively). Many trustees were frustrated by the lack of technical strategic advice offered by financial advisers, and the shallow knowledge pool about regulations and specific strategies, such as contributions limits. A large 40.6% of trustees believe that advisers are selling products to benefits themselves, not the client. SMSFs are taking to infrastructure investments, says AMP Capital Core Infrastructure Fund portfolio manager Perry Lucas. He says about 10% of the fund’s inflows are from DIY funds and it is exciting that sophisticated players, as well as retail investors, are starting to include infrastructure in their portfolios. Lucas cited lower volatility, diversification between listed and unlisted assets, and the chance to invest in projects that are usually exclusively the domain of institutional investors as the reasons for the AMP fund’s popularity. SMSFs will be excluded from APRA’s plans to monitor superannuation funds more stringently. Under the government’s superannuation reforms, APRA intends to impose similar oversight on super to that of the insurance and banking sectors, including governance, risk management, auditing, and defined-benefit funding and solvency. The measures will come into effect on July 1, 2013, and APRA deputy chairman Ross Jones says they will allow the body to move faster to solve problems and strengthen the wider super system, but it is “impractical” to monitor the over-450,000 SMSFs currently operating. The ATO may alter SMSFs’ annual returns in order to streamline and enhance the quality of information it collects about the sector. Assistant commissioner of superannuation Stuart Forsyth told the SPAA 2012 national conference that the tax office is looking at consulting with other industry groups to find the best way to design data collection on DIY funds “with a focus on minimising the additional reporting requirements placed on SMSFs”. He says the process will continue through until 2014.

The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are advised to consult your financial adviser.

Bruce Brammall is director of Castellan Financial Consulting and author of Debt Man Walking.