What's the difference between SMSFs and small APRA funds?

Should you use an SMSF or an SAF?

While both are small funds, there are important distinctions.

SMSFs are not the only type of small super fund available in the marketplace.

Another type of fund is called a small APRA fund, often shortened to SAF. Like an SMSF, SAFs are also restricted to a maximum of four members.

These different types of funds have different regulators. As their name implies, small APRA funds are regulated by the Australian Prudential Regulation Authority (APRA). SMSFs, of course, are regulated by the Australian Taxation Office (ATO).

There are a number of similarities – and a number of differences – between SMSFs and SAFs.

Let’s start with a major difference.

Who can be a trustee of an SMSF?

Both SMSFs and SAFs are trusts and therefore need trustees. The difference is who can be a trustee of each entity.

As you most likely know, all the trustees of an SMSF must also be members of the fund and there can be no other trustees. There are, however, some special exceptions to these rules.

For example:

  • Minor children, who are considered to be under a legal disability so a parent or guardian can be a trustee in their place.
  • People suffering from mental incapacity may have a legal personal representative acting as their trustee.
  • A legal personal representative may also be a trustee if they hold an enduring power of attorney in respect of the SMSF member.

Who can be a trustee of a SAF?

Small APRA funds operate under a very different set of rules. The super laws define a SAF as a Registrable Super Entity (RSE). This means that a SAF’s trustees can only be those organisations that hold a Registrable Super Entity Licence issued by APRA.

Obtaining and retaining these licences is a long, complex and costly affair, which is why SAFs are usually only offered by large organisations.

In addition, these organisations typically offer SAFs to a wide range of investors, which means they also need an Australian Financial Services Licence, issued by ASIC, that authorises them to offer products to the general public.

If an SMSF doesn’t satisfy the trustee/member nexus or one of the available exemptions, then technically the fund automatically becomes a SAF.

Immediately, this means the trustee needs to be a RSE. Most SMSF trustees would be unable to obtain an RSE licence (or wouldn’t be able to justify the time or cost of getting one) but could move their SMSF to a SAF run by an RSE.

Some RSE trustees that offer SAFs (and there are only a handful in the marketplace) insist that the SAFs they’re responsible for hold a restricted range of assets. For example, a SAF might not be permitted to own shares in unlisted companies or trusts related to you or your relatives. Artwork and collectibles might also be off the list of approved investments. These restrictions often have nothing to do with the super laws but more to do with the operational efficiency of the SAF trustee business.

Why would you use a SAF instead of an SMSF? 

There are four main reasons:

1. The first potential reason is old age. If you live to a ripe old age, at some point in the future you could reach a stage where you no longer feel capable of making important financial decisions. You might not have children or other relatives or friends you can ask to assist you, so you may decide to hand over responsibility for running your fund to a professional RSE-licensed trustee.

In an ideal world, you should make decisions about your future before your inability to make decisions becomes obvious even to yourself. But we don’t live in an ideal world.

2. Another potential benefit of a SAF over an SMSF is if a fund member is going overseas for an indefinite period of time. Under the tax laws, if we become non-residents for income tax purposes we run the risk of our super fund also being made a non-resident super fund.

When this occurs, the tax penalties are very high – in the year a super fund moves from being a resident fund to a non-resident fund, the market value of all assets of the fund (except non-concessional contributions) are taxed at 46.5 per cent. Then when a fund moves from being a non-resident fund back to a resident fund, the same tax penalty applies!

This disaster can be avoided by stopping a fund from being an SMSF and changing it to a SAF before leaving Australia.

3. The third reason for using a SAF involves bankruptcy. A person who is bankrupt cannot be an SMSF trustee and hence can’t be an SMSF member. In addition, the super laws say that a bankrupt’s legal personal representative can’t act as their trustee on their behalf. However, a bankrupt could be a SAF member.

4. The final reason we might use a SAF is a lack of time to run an SMSF but a desire not to be in a large retail super fund. This applies to many people who are time poor. They want to be in a small super fund so the only way to solve this problem is to use a SAF.
Tony Negline has worked in financial services for more than 25 years and has been heavily involved in self-managed super funds since mid-1994. He writes about SMSF matters for a wide range of audiences including accountants, auditors, financial advisers and SMSF trustees.