The case for small APRA funds

Julie Steed explains why a small APRA fund can provide clients with control but without the administration responsibilities.

Many clients want to take control of their super but don’t want the complex compliance and administration responsibilities that come with a self-managed superannuation fund (SMSF).

Establishing a small APRA fund may provide the perfect balance between a high level of investment decision control and a low level of legislative responsibilities.

What is a small APRA fund?

A small APRA fund is essentially a SMSF that has a professional licensed trustee that is responsible for all of the legislative, compliance and administrative responsibilities.

Small APRA funds provide clients with all of the legislative advantages afforded to SMSFs, but without the risks associated with being a trustee and of breaching legislative compliance requirements.

They are also an effective solution for advisers looking for the control of a SMSF without the administration time commitment and compliance risks.

For advisers, there is no requirement to hold and maintain SMSF specialist advice qualifications.

Compliance

In a SMSF, the compliance risk is borne by the trustee/members. The ability to manage effective compliance and investment management plans requires skill, expertise and time.

Many SMSF trustees will perform their compliance responsibilities soundly, often with the aid of professional advisers.

However, a number of trustees will be unaware of the full extent of their responsibilities or simply have insufficient time to dedicate to their responsibilities.

In a small APRA fund, the compliance risk is borne by the professional licensed trustee whose core business is the provision of trustee services.

The licensed trustee can reasonably be expected to be skilled and experienced, so common breaches of legislative requirements can be avoided or minimised.

The licensed trustee will also issue a Product Disclosure Statement and annual member statements, which are tools that will often assist members with understanding how their superannuation works.

Administration

The administration of small APRA funds is generally performed by professional administration organisations appointed by the licensed trustee.

Record keeping will generally be timely and complete since the licensed trustee controls custody of all assets and receives all information and transactions directly.

The use of a professional trustee may provide cost reductions through economies of scale for the provision of professional services.

An APRA study of small APRA funds indicates that the average expense ratio of a small APRA fund is approximately 1.8 per cent, compared to an average expense ratio of 2.3 per cent to 3.1 per cent for non-small APRA fund portfolios.

Investments

The investment universes are technically the same for small APRA funds and SMSFs, although small APRA funds are likely to have access to wholesale investments (due to their size) that are not available to SMSFs.

Different licensed trustees will have different requirements for the approval of assets to be held in a fund and these are likely to be less generous than those approved by individual trustee/members in SMSFs.

Conversely, common investment related breaches such as the purchase of assets from related parties are unlikely to occur in a .

Trusteeship

Small APRA fund trusteeship is provided by an APRA-licensed trustee, which will be a professional trustee company.

The licensed trustee will invariably be very familiar with the fund’s trust deed, superannuation legislation and trustee responsibilities.

Trusteeship of a SMSF may cause difficulties for a number of clients including those facing bankruptcy, non residents and loss of capacity.

In addition, an undischarged bankrupt is unable to be a trustee and is therefore unable to be a member of a SMSF.

There are no legal issues with disqualified persons being members of a small APRA fund.

If a SMSF trustee/member becomes a non resident, the fund will generally fail to meet the definition of an Australian superannuation fund and will therefore not meet the requirements for concessional tax treatment.

The trustees of a SMSF may be able to retire as trustee and appoint a legal personal representative (LPR) who holds an enduring power of attorney (POA) in their place.

However, the member can then have no ongoing high-level involvement in the decision-making and operation of the fund (this must all be completed by the new trustee).

It is also important that the trust deed of the SMSF allow a person to be a member of a fund without the requirement that they be a trustee.

Provided non-resident members don’t contribute (or resident members who contribute hold greater than 50 per cent of the fund’s assets).

Small APRA funds can generally meet the requirements of the definition of an Australian superannuation fund.

Loss of capacity through dementia or other illnesses is also a source of concern for SMSF trustees that does not affect members of a small APRA fund.

The prevalence of dementia is projected to increase over four-fold from 245,400 people in 2009 to around 1.13 million people by 2050, so the concerns will continue to escalate.

In a small APRA fund, the professional trustee company will continue to manage the fund for the benefit of the members, regardless of their health.

Winding up a SMSF

One of the common barriers to moving out of a SMSF is that the move to a retail, corporate or industry fund arrangement will result in capital gains tax (CGT) being incurred.

However, the imposition of CGT is entirely avoided if members move from a SMSF to a small APRA fund by retiring as trustees themselves and appointing a licensed trustee.

Greater knowledge of this option would perhaps result in a smaller number of trustees continuing in the role, even though they have concluded that they are not suited to the obligations of being a trustee.

This can be particularly beneficial for SMSF trustee/members who were skilled and committed in their younger years but who have become less interested and able as they have aged.

Conclusion

Establishing a small APRA fund may provide the perfect alternative for clients wanting the flexibility and control of a SMSF, but without all the compliance risk and responsibility of a trustee.

A small APRA fund may also provide clients with a very tax-effective exit strategy from a SMSF.

Julie Steed is technical services manager at AET Super Solutions.