If you want to access many of the benefits of investing through an SMSF structure, but for any one of a number of reasons are unable or unwilling to set one up, you might instead consider a similar type of fund call the SAF. In very basic terms an SAF is the same as an SMSF, though the member cannot be the trustee. Knowing the differences and similarities between SMSFs and SAFs will help you decide which one is the best investment vehicle for your situation.
Why SMSFs and SAFs are so similar
Both are limited to a maximum of four investing members, with the title of the assets held in the name of the trustee(s). Both funds are also good for those investors who might want a little more control over their investments: the investment strategy in each case can be tailored to individual need, though some SFA trustees may place restrictions on this. The regulator of the fund will have to be furnished with annual reports in each case, and it is with the regulator that the differences between the two funds begin.
Why SMSFs and SAFs are so different
The SMSF industry is regulated by the Australian Tax Office (ATO) while SAFs are regulated by the Australian Prudential Regulation Authority (APRA). APRA insists that the trustees of an SAF hold an appropriate licence – the Registerable Super Entity Licence (RSE). Obtaining an RSE is a time consuming and complicated process, and combined with the cost of licencing this means that most SAFs are offered by larger organisations. SAF issuers generally offer the funds to a wide range of investors, and so it is usual that they also hold an Australian Financial Services Licence.
On the other hand, SMSF trustees do not need to be licenced as they are SMSF members.
Exceptions to the requirement for SMSF trustees to also be a member of the SMSF exists where
- The SMSF member is a child, in which case the trustee would be a parent or guardian
- The SMSF member is suffering from a mental incapacity, in which case the trustee would be a legal personal representative
- An enduring power of attorney is held by the legal representative of the SMSF member
The SAF may incur higher costs because of the status of its trustee: professional trustees will be paid, whereas trustees who are fund members are not be financially remunerated.
Members of SAFs are protected under the ‘culpability test’ which is designed to protect members who are not trustees, whereas SMSF members do not have this level of protection.
The benefits of an SAF over an SMSF
As can be seen, the costs of an SAF are likely to be a little higher than those of an SMSF, and while the investment strategy is tailorable in both cases choice may be restricted by the trustees of the SAF. So, why would you want to choose an SAF over an SMSF?
The decision to do so rests on four main reasons, three of which are lifestyle led and the last concerns financial status.
- You expect to live to an old age
If you live to an old age, it is likely that your mental capacity will deteriorate. If you have no family to help you, important financial matters could become problematic. In such a case, you might decide that a professional trustee would do a better job of running your funds than you.
- To avoid tax liability if you go overseas
People who go overseas for an extended period could become non-residents for tax purposes. If this happens, an SMSF could be declared a non-resident super fund and attract tax of 46.5% on all of its assets: and when you become an Australian resident again you’ll have to pay the same tax to revert the fund back to resident status.
- Lack of time to administer an SMSF
It could be that you want the benefits of investing within an SMSF structure but simply don’t have the time to commit to trustee duties. An SAF solves this conundrum.
- You cannot become a trustee because of bankruptcy
If you have been declared bankrupt, you cannot become a trustee and so are ineligible to be a member of an SMSF (and your legal personal representative is also ineligible to do the job for you); but you can be a member of an SAF.
Consider your options and lifestyle before choosing between an SAF and an SMSF
Which fund investment vehicle is right for you will depend on a number of issues, including your investment objectives and your lifestyle now and going forward. Before you make the choice, consider all your options with a qualified and experienced professional advisor by contacting Super Finance today for a free, no obligation initial consultation.
