The new super question: set up an SMSF or an SAF?

The growth in self managed superannuation has grown in recent months as the result of changes in legislation. Ben Smythe investigates what advisers should be telling clients.

With acronyms such as GST, PAYG and CGT taking over the financial services industry, one such acronym is no longer. The acronym "Do It Yourself" superannuation has been replaced. As most would be aware, a DIY superannuation fund is simply a superannuation vehicle that allows up to four people to pool together their superannuation entitlements into one fund. The actual expression "DIY fund" has been replaced by the defined terms:

Self Managed Superannuation Fund (SMSF); and Small APRA Fund (SAF).

Most advisers understand the SMSF structure and promote this superannuation structure to clients who are looking for control/ownership, unlimited investment choice, pension/estate planning flexibility and many other subtle advantages that these funds offer over traditional superannuation vehicles.

Advisers know a SMSF is a fund with 4 or less members regulated by the Australian Tax Office (ATO) with particular trustee requirements. The actual trustee requirements depend upon whether the fund is a single member fund or has between two and four members, but essentially involves all members acting as the fund's trustee.

A SAF is a little less known in the industry but offers similar benefits to that of a SMSF. A SAF is also a fund with four or less members, however the members appoint an approved trustee to act as the trustee of the fund. A SAF is regulated by the Australian Prudential Regulation Authority.

There is a common misconception that members of a SAF lose control by appointing an approved trustee. In fact most approved trustees provide members with full discretion with respect to investments, fund membership, and fund administration services. The approved trustee is effectively responsible for handling the difficult issues like compliance and custody of the assets.

Which choice should I be recommending?

The choice of fund structure is an individual preference and should be made strategically to satisfy the needs of individual members of the fund. There are costs and benefits of both structures and careful consideration on a client by client basis is required.

A SMSF structure suits the type of client who:

Is willing to act in the capacity of trustee;

Wants active involvement in the trustee decisions;

Is diligent and prudent in ensuring the compliance of the fund; and

Does not want to interpose an approved trustee.

While a SAF structure suits the type of client who:

Does not want to act as trustee;

Wants to be actively involved in the investment decisions of the fund only;

Does not want to worry about ensuring the compliance of the fund; and

Is happy to interpose an approved trustee.

A SMSF or SAF member is perceived in the industry to be a person who is educated and interested in their superannuation and wants a say in how their retirement savings are managed. However the choice of the actual fund structure, ie SMSF v SAF, has not traditionally triggered a substantial fact finding exercise by advisers. Usually a client identified as an ideal DIY fund candidate is typically informed by an adviser of the SMSF structure and will rely upon the adviser's recommendation and set up a SMSF.

Some advisers may provide their clients with educational material regarding the SMSF structure which identifies their responsibilities but usually the client will accept the trustee role without questioning their role or its responsibilities.

From our experience it appears that most advisers will have "A" and "B" clients. "A" clients are ideal SMSF clients, in that they are keen to be involved in the management of the fund and have the time and capability to handle the trustee responsibilities. An adviser's B clients are ideal SAF clients, in that they are either time poor clients or they do not have the skill or requisite knowledge to satisfy the trustee role. Alternatively the adviser may not have confidence in the client acting as trustee and hence the SAF structure is the ideal alternative.

What do they need to know?

As advisers become comfortable with the new SMSF and SAF structures, ideally they will identify which structure is the most suitable for their clients and recommend either a SMSF or a SAF accordingly. Advisers who recommend one structure over the other should highlight the rationale for their recommendation to their client and in the case of a SMSF, explain to their client their responsibilities as trustee.

The importance of the trustee role is now similar to the role of a director within a company. Each trustee must ensure that they are aware what is happening within the fund and if they are unsure of what to do in particular circumstances or do not fully understand a part of their trustee role, then they must seek advice so as to fully discharge their trustee role.

Some of the more important trustee responsibilities for SMSF members include:

Ensuring the fund does not breach provisions of the SIS Act and is complying at all times;

Overseeing service providers, such as the administrator, accountant, auditor, etc, so that for example the fund's accounts and returns are completed and lodged before a certain date; and

Managing the investments of the fund, ensuring that suitable investments are in place and the members' benefits are invested for retirement purposes.

In particular with regards to managing the investments of a SMSF, trustees must keep themselves abreast of changing legislation or seek advice so that they are kept informed. The trustee must ensure that specific investment guidelines within the SIS Act are adhered to at all times and simply claiming ignorance of the legislation will not be acceptable.

Members of a SMSF must take their role as trustee seriously as a breach of the SIS Act can result in fines of up to 50% of the fund's assets, and in some extreme cases jail sentences and fines for the trustee.

Where do I get this information for my client?

As regulator, the ATO has advised SMSF trustees and advisers that they will assist them in managing their SMSF. The ATO's website contains helpful documents and case studies dealing with the trustee responsibilities for SMSFs and what members need to know as trustees. In addition experts who specialise solely in SMSFs are able to assist advisers, particularly with regards to ongoing education and training in this area.

Under the SAF structure, the members effectively outsource this trustee responsibility to an approved trustee. In this way advisers are able to tap into the expertise of an approved trustee and remove themselves from any potential backlash from clients as a result of non-complying SMSFs.

While these changes may seem daunting to some advisers, the positive thing to note is that clients will look to their advisers for guidance. Advisers who are able to educate their clients and assist them in growing their retirement savings through their SMSF or SAF structure will not only strengthen the relationship but also potentially attract new clients who experience poor service.

Australian Superannuation Nominees Limited

Managing Director, Ben Smythe.