Self-managed superannuation funds (SMSFs) continue to grow strongly, but another category of fund is also posting strong growth, even though it doesn’t get anything like the same exposure.
Small APRA Funds (SAFs) grew by more than 10 per cent in 2006-07, and the growth rate is tipped to accelerate, as a growing number of individuals, and their planners, seek an alternative to the SMSF structure, as their circumstances change.
A key structural difference between an SAF and an SMSF is that, in an SMSF, all members must also be trustees, and the funds are regulated by the Australian Taxation Office; members of an SAF do not have to be trustees (an approved corporate trustee is appointed instead), and the funds are regulated by the Australian Prudential Regulation Authority (APRA).
The level of control and flexibility that members of SAFs have is less than that enjoyed by SMSF members, but Michael Hutton, wealth management partner with HLB Mann Judd in Sydney, says there are situations when SMSF members might be happy to relinquish some of that control in return for relinquishing some of the more onerous responsibilities.
Hutton says the growth of SAFs is “reasonable” and is an area more financial planners could profitably focus on.
“I am not saying this is going to be a major part of the market, or take over from self-managed funds, but I am saying I think there are going to be more and more situations in the future where people are going to be wanting an independent trustee,” he says,
Hutton says these situations include:
– As fund members get older, they may lose the desire to keep managing their own fund.
– “dominant” member/trustee may pass away, but the remaining members do not want to wind up the fund.
– The members of an SMSF are posted overseas and want to maintain their fund’s Australian resident status.
– The trustees of an SMSF decide they want to allow key employees to become members of the fund.
Sometimes members might choose to abandon the SMSF structure voluntarily – after they have come to understand the amount of time and effort it takes to run one efficiently, and sometimes because they have learned that their investment ability is in fact no better than the professional alternatives.
But sometimes the decision is involuntary, and might follow the death of one or more of the fund’s members. Even though all members of an SMSF must also be fund trustees, and so they theoretically share equally in the responsibility of managing the fund, it’s not unusual for one member to be dominant in terms of decision-making or calling the investment shots.
Hutton says that in these circumstances, advisers should consider if converting an SMSF to an SAF is a good idea.
“You have to have a registrable superannuation entity, an RSE, as the trustee [of an SAF] and there are more obligations on an RSE than on an SMSF trustee, including solvency and capital adequacy requirements, to make sure the entity has operating capability,” Hutton says.
It’s important to note that an RSE licence is quite separate from an Australian Financial SerÃ‚Âvices Licence (AFSL), so companies wanting to act as an RSE of an SAF must apply for and receive a specific RSE licence – they cannot assume they’re covered by an AFSL that they may already hold.
Hutton says there is inevitably paperwork involved – a conversion from an SMSF to an SAF requires dealing with two different regulators – but the conversion can be achieved without necessarily having to sell fund assets, and without triggering a capital gains tax event.
In some sense, an SAF offers more flexibility. For example, provided the membership rules are not breached (an SAF must have fewer than five members, just like an SMSF), the members of an SAF can include employers and employees.
“What they generally do, these trustees, is give people parameters within which they’re happy to act as trustee of your fund,” Hutton says.
“You can then choose assets that fall within those parameters – so they’re still quite flexible.”
Hutton says it’s still possible for an SAF to own business real property, for example, and to lease the property back to the business. And, of course, the benefits of arranging life insurance via a super fund apply to an SAF in the same way as an SMSF.