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Self Managed Super Fund (SMSF) Article
SMSFs and Small APRA Funds
By Tony Negline.
This article may be out of date.
17th August 2005
Under the super laws two types of DIY super funds are allowed – Self Managed Super Funds – often called SMSFs – and Small Australian Prudential Regulation Authority Funds which are generally referred to as Small APRA Funds or SAFs.
There is one important similarity with these fund types. Both funds can have no more than four members.
Equally there are some important differences between SAFs and SMSFs:
- Government Regulator – SMSFs are regulated by the Australian Taxation Office for super laws and tax. SAFs are regulated APRA for super laws and ATO for tax. SMSFs and SAFs are regulated by ASIC for product disclosure and ongoing member reporting however SAFs must satisfy a much more onerous regime than SMSFs
- Trustees – the members of all SMSFs must be trustees, whereas only organizations approved by APRA, currently called Approved Trustees but soon to be known as Registrable Superannuation Entities (RSE) can be trustees of SAFs. Currently there are about thirty organizations that are allowed to be trustees of SAFs but only about three organizations, who are all professional trustee organizations, are actually in this business
- Disclosure – there is some debate about the need for SMSF trustees to produce Product Disclosure Statements whereas trustees of SAFs must produce a PDS and abide by complex product disclosure requirements that much larger super funds must follow
- Flexibility – a SMSF is sometimes more flexible that a SAF especially in relation to the investments that can be held within the super fund and also in the type of benefits that can be paid from the fund.
Some investors who want to put their retirement asset into a small super fund may find that they are not allowed to use a SMSF and are therefore forced to use a SAF. For example:
- investors who have been banned by either the ATO or APRA from being a super fund trustee cannot use a SMSF. Members of SMSFs must also be trustees and because these people cannot be trustees they cannot be SMSF members. A super regulator will ban investors from taking positions of responsibility in the superannuation arena where the regulator believes the person has breached the super laws either very seriously or persistently or the regulator believes the person is not a fit or proper person and hence should be disqualified
- investors who are not allowed to be trustees of SMSFs because they have committed a crime involving dishonesty such as fraud, theft or embezzlement or have been declared bankrupt. The statute of limitations, which in most Australian jurisdictions is 10 years, does not apply. People who fall into this category can apply to either the ATO or APRA to have their crime ignored which would allow them to be a SMSF trustee.
People who ignore these particular requirement risk up to six months jail or being fined its monetary equivalent.
Other investors, given their personal circumstances, may be permitted to be a trustee of a SMSF but might prefer to run a SAF. For example:
- older investors who have reached an age where they are no longer able to effectively make management and operational decisions
- Australian citizens who are no longer resident for income tax purposes may want to avoid penalty taxes that may apply to their SMSF where it is deemed to be a non-resident fund. This is a very serious issue for the increasing number of Australians who spend more than two years living and working overseas.
If a small fund is changed from a SMSF to a SAF there is no need to wind the SMSF up and start a new fund. Effectively the SMSF trustee resigns and is replaced by an Approved Trustee. The ATO is told the fund is no longer a SMSF and APRA is told that it now has another fund to regulate. Most Approved Trustees will insist that a fund's trust deed is altered to their standard small fund trust deed.
Additionally, before agreeing to take on a SMSF, an Approved Trustee will carefully examine a fund. They will want to make sure the fund complies with all the relevant laws and has always complied. If a fund hasn't always complied then it must be completely cleaned up before any Approved Trustee will be prepared to take it on. Assets that are not acceptable to the Approved Trustee will have to be disposed of. Typically this will be assets that either have negligible return or make up a disproportionately large percentage of total fund assets.
Instead of using a SAF investors who find themselves in any of the above situations might consider shutting down their SMSF and transferring their super fund monies to another type of fund such as a retail fund. However anyone who has not retired and wants to transfer assets between super funds must factor in Capital Gains Tax. Retired SMSF members who have to transfer their retirement assets into another superannuation vehicle might face Reasonable Benefit Limit issues which must be factored into any decision.
This email is general in nature only and does not constitute or convey specific or professional advice. Legislation changes may occur quickly. Formal advice should be sought before acting in any of the areas discussed. Be aware that the information in these articles may become innaccurate with time. Responsibility is disclaimed for any inaccuracies, errors or omissions. Particular investments are neither invited nor recommended and hence this publication is not "financial product advice" as defined in Section 766B of the above legislation. All expressions of opinion by contributors are published on the basis that they are not to be regarded as expressing the official opinion of any other person or entity unless expressly stated. No responsibility for the accuracy of the opinions or information contained in the contributor's articles is accepted by any other person or entity. Copyright: This publication is copyright. If you wish to reproduce this article you require a license, which can be purchased here, to do so.