The release of the Ripoll report and the Cooper review has generated significant activity in advisers assessing their profitability and dealer groups assessing their compliance risks. As more effective business models are being investigated, advisers are turning to Small APRA funds (SAFs) as a solution. This article focuses on the advantages of a SAF over an SMSF and provides a number of instances where a SAF may provide a superior outcome for both clients and advisers.
A SAF is essentially an SMSF that has a professional licensed trustee which is responsible for all of the legislative, compliance and administrative responsibilities.
SAFs are an alternative for members looking for the flexibility of a self managed superannuation fund (SMSF) but without the burden of being a trustee and the associated compliance risk. They are also an effective solution for advisers looking for the control of an SMSF without the administration time commitment and compliance risks.
As at March 2010, there were approximately 422,000 SMSFs and approximately 3,800 SAFs1. The SMSF sector is generally recognised as the fastest growing sector of the superannuation industry and has been for some time. Clearly, SAFs are not as prevalent in numbers as SMSFs and in many instances this is due to a lack of awareness of their existence and benefits.
SAFs provide all of the legislative advantages afforded to SMSFs, without the risks associated with being a trustee and of breaching legislative compliance requirements. For advisers, there is no requirement to hold and maintain SMSF specialist advice qualifications.
The main characteristics of SAFs and SMSFs are outlined in the table below:
Characteristic |
SAF |
SMSF |
|---|---|---|
Less than 5 members |
Yes |
Yes |
Trusteeship |
Professional Licensed Trustee |
All members are trustees |
Regulator |
APRA |
ATO |
Responsibility for compliance |
Professional Licensed Trustee |
Trustee members |
Acquisition of business real property |
Yes |
Yes |
Member directed investments |
Yes (trustee may have some restrictions) |
Yes |
Access to Superannuation Complaints Tribunal |
Yes |
No |
Disqualified person as a member |
Yes |
No |
Non-resident person as a member |
Yes (may not be able to contribute) |
Generally no |
Members who have an employee/employer relationship |
Yes |
No, unless they are related |
The preliminary report from the Cooper Review Panel indicates that the SMSF sector is a robust and significant part of the superannuation system that is essentially soundly managed. However, it is clear that improvement is possible. The Panel acknowledges that service providers play a significant 'gatekeeper role' in SMSFs and that service providers are utilised in some form by the majority of trustees. It was noted that raising the qualifications, competency and professional standards of service providers to SMSF trustees is desirable. The Panel recommended that the requirement for RG 146 should include a specialist SMSF knowledge requirement for advisers who advise SMSFs.
The current RG 146 training requirement to provide advice on SMSFs is the completion of training in the specialist knowledge area of superannuation. The specialist knowledge area includes SMSF advice as a sub-category of superannuation in acknowledgement of the complexities involved in providing SMSF advice. Whilst completion of the sub-category specialist knowledge is not currently required, ASIC encourages the completion of SMSF training as best practice.
Since dealer groups have a legal obligation to ensure that their advisers are adequately trained and competent to provide the services covered by the dealer group licence, completion of the SMSF training is regularly a dealer group requirement for advisers who provide services to SMSF clients. If the changes recommended by the Cooper Review are accepted, completion of the specialist training will become mandatory.
The administration of SMSFs can vary dramatically between funds, with poor performance of smaller/non-professional administrators often experienced. SMSF administration is typically 'after the event' administration which relies heavily on the trustee/members providing timely and accurate information. There is often limited access to real-time information.
The administration of SAFs is generally performed by professional administration organisations appointed by the licensed trustee and are often controlled by the licensed trustee. There is likely to be a consistent compliant approach to administration with common compliance breaches unlikely to occur. The administration will record all fund transactions on behalf of the licensed trustee including collection of fund income, payment of expenses and asset purchases and sales. Record keeping will generally be timely and complete since the licensed trustee controls custody of all assets and receives all information and transactions directly. Generally, advisers and members will have online access to account information with daily portfolio valuations.
As the industry moves towards a fee for advice model, advisers are becoming all the more cognisant of their profitability. Activities that don't generate income are being scrutinised. SMSF administration activities that advisers attend to, such as receiving, recording and filing SMSF mail and responding to enquiries from accountants and auditors all take time and need to be incorporated in an adviser's cost recovery. However, these activities are not always recognised by clients as adding value that they are prepared to pay for. In addition, any time that an adviser spends on SMSF administration is time that is not available for providing advice.
In a SAF, the licensed trustee will receive all correspondence, maintain all records and provide online, real time information to assist advisers and clients. The licensed trustee will also deal with all enquiries from the fund's service providers and government regulators.
Trustees of a superannuation fund are responsible for the prudential management and conduct of the fund. Trustee duties are primarily sourced from trust law, the trust deed, SIS legislation and various state-based Trustee Acts. The SIS legislation codifies the covenants that all trustees must comply with and sets minimum operating standards, the breach of which could lead a fund into non-compliance and the imposition of penalties on its trustees.
Trusteeship of an SMSF may cause difficulties for a number of clients including those facing bankruptcy and non-residents.
Disqualified persons
A disqualified person is an individual who:
- has been convicted of an offence involving dishonesty;
- is an undischarged bankrupt; or
- has been disqualified by a Regulator of a civil penalty.
A disqualified person is unable to be a trustee (of any type of trust) and is therefore unable to be a member of an SMSF. There are no legal issues with disqualified persons being members of a SAF.
Residency
From 1 July 2007, the Income Tax Assessment Act (ITAA) 1997 provides for a revised definition of an Australian superannuation fund, being a fund which is entitled to concessional tax treatment. If a fund fails to meet the test at any time during an income year, they do not meet the definition of an Australian superannuation fund and may be taxed at 45 per cent.
If an SMSF trustee/member becomes a non-resident, the fund will generally fail to meet the definition.
The trustees may be able to retire as trustee and appoint a legal personal representative (LPR) who holds an enduring power of attorney (POA) in their place. However, the member can then have no ongoing high level involvement in the decision making and operation of the fund; this must all be completed by the new trustee. Obviously, this requires the member to be fairly trusting of their LPR. It is also important that the trust deed of the fund allows a person to be a member of a fund without the requirement that they be a trustee.
Provided non-resident members don't contribute (or contributory resident members hold greater than 50 per cent of the fund's assets), SAFs can generally meet the requirements of the definition.
SAF trusteeship is provided by an APRA licensed trustee, which is a professional trustee company. The licensed trustee will invariably be very familiar with the fund's trust deed and with superannuation legislation. In addition to reducing compliance risk, the use of a professional trustee may provide cost reductions through economies of scale in respect of the provision of professional services. An APRA study of SAFs indicates that the average expense ratio of a SAF is approximately 1.8 per cent, compared to an average expense ratio of 2.3 per cent to 3.1 per cent for non-SAF portfolios2.
In an SMSF, the compliance risk is borne by the trustee/members. The ability to manage effective compliance and investment management plans requires skill, expertise and time. Many SMSF trustees will perform their compliance responsibilities soundly, often with the aid of professional advisers. However, a number of trustees will be unaware of the full extent of their responsibilities or simply have insufficient time to dedicate to their responsibilities.
In a SAF, the compliance risk is borne by the professional licensed trustee whose core business is the provision of trustee services. The licensed trustee can reasonably be expected to be skilled and experienced and what are common breaches of legislative requirements for an SMSF be avoided or minimised. The licensed trustee will also issue a product disclosure statement and annual member statements which are tools that will often assist members with their understanding of how their superannuation works.
In addition, if a SAF is in breach of SIS, any penalty imposed by the Australian Prudential Regulation Authority (APRA) may be mitigated by applying a 'culpability test'. This test helps protect arm's length members who were not involved in the decision making that gave rise to the breach of SIS. Generally, it is difficult to apply this concession to an SMSF due to the mutuality between members and trustees.
The investment universes are technically the same for SAFs and SMSFs. However, SAFs are likely to have access to wholesale investments (due to their size) that are not available to SMSFs. Different licensed trustees will have different requirements for the approval of assets to be held in a fund and these are likely to be less generous than those approved by individual trustee/members in SMSFs. Conversely, common investment related breaches such as the purchase of assets from related parties are unlikely to occur in a SAF.
One of the common criticisms of a barrier from moving out of an SMSF which is found to be an inappropriate arrangement for a particular person is that the move to a retail, corporate or industry fund arrangement will result in capital gains tax (CGT) being incurred. The imposition of CGT is, however, entirely avoided if members move from an SMSF to a SAF by retiring as trustees themselves and appointing a licensed trustee. Greater knowledge of this option would perhaps result in a smaller number of trustees who have concluded that they are not suited to the obligations of being a trustee continuing in the role. This can be particularly beneficial for SMSF trustee/members who were skilled and committed in their younger years but who have become less interested and able as they age.
A SAF may provide a useful alternative to clients who require the flexibility of an SMSF without the compliance burden of being a trustee. A SAF may also provide clients with a very tax effective exit strategy from an SMSF. For advisers, SAFs can provide a low risk business model and assist in minimising administration expenses, leaving advisers with more time to advise.
1APRA Quarterly Superannuation Performance March 2010
2Wilson Sy – APRA working paper – Cost, Performance and Portfolio Composition of Small APRA Funds, December 2007
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