What is a super fund?
A superannuation fund is simply a form of trust designed to provide retirement or death benefits for its members, and those members are the beneficiaries. The trust deed and the operation of the super fund needs to comply with the SIS Act and Regulations.
A superannuation fund is a tax-effective structure for accumulating savings for retirement and to provide income and/or capital throughout retirement of the fund members.
Saving money in a super fund can be a better option instead of another savings or investment structure because of the following reasons:
- legislative compulsion (compulsory employer superannuation guarantee contributions for employees must be paid to a superannuation fund and can only be accessed in specific circumstances)
- tax-effectiveness (lower tax rates or other concessions on benefit payments from the fund, concessions for making contributions, and concessional tax treatment of superannuation funds)
- integration with business enterprise (transferring business real property to the fund, borrowing money, insurance cover for members)
- savings discipline (all superannuation contributions, whether compulsory or voluntary, must be preserved until retirement or a prescribed condition of release is met).
Here are three steps to follow before deciding to accumulate savings using super:
Step 1 — Decide on the optimal structure
Whether to use a superannuation fund as the savings vehicle. The issue of choice does not arise in the case of mandatory superannuation contributions which must be paid to a superannuation fund in all cases. In this case, the choice rests between using a managed fund (e.g. a retail, employer/corporate or industry fund) or an SMSF.
Step 2 — Decide on the type of superannuation fund
Whether to self-manage the fund (ie establish and operate an SMSF) or use a professionally managed fund (ie a retail or public offer fund). Establishing a “small APRA fund” can also be considered as an alternative to an SMSF where a person is unable or unwilling to assume the role of trustee.
Step 3 — Set up the fund and/or membership
If using an SMSF, prepare a trust deed for the fund, decide on who will be members and whether to have a corporate trustee or individual trustees for the fund. Please note that when a client wishes to have some of the advantages of an SMSF without being responsible for the management could consider a small APRA fund (ie a fund with fewer than five members which is regulated by APRA and where the trustee must be an approved RSE licensee under the SIS Act).
Types of Super Funds
There are 5 basic types of funds you may be able to choose from:
Industry Super Fund
Before industry superannuation funds were linked to a trade union and available only to people who worked in a particular industry. But now they are expanding their membership base so that those working in other industries and the general public can be members. Industry super funds are called “not-for-profit” fund because the fund does not generate profits for itself. The one who generate profits are the organisations contacted by the trustee to provide services for the operation of the fund for example those relating to the administration, insurance, and investment. Employer and employee representatives comprises the trustee structure and this establishes an arm’s length relationship between the members and the trustees of the fund. The benefit of an industry superannuation fund is the professional management for both the operation of the fund as well as investment management with lower expected fees. Members may also gain cheaper and easier access to insurance through group policies although generally only for limited amounts of cover. These advantages may be offset by restricted investment choice, loss of control and a loss of some potential tax benefits.
Retail Super Fund
Retail superannuation funds are offered publicly and are operated by fund managers who may act as the trustee of the fund as well as the administrator. The benefit of a retail superannuation fund is professional management for both the operation of the fund as well as investment management. However, this may be offset by higher fees, restricted investment choice, lack of control and a loss of some potential tax benefits. Retail superannuation funds traditionally offered investments managed by the operating fund manager only. However, these products have expanded into master trusts which offer investments with a range of managers under the one fund structure. Some may also allow investment in direct shares. Wrap accounts identify ownership of individual assets more directly to each member. This allows the taxation implications of each investment and transaction to be allocated directly to that member’s account. A wrap account replicates more closely the taxation management of an SMSF.
Employer/Corporate Super Fund
Employer superannuation funds are operated by organisations for the current employees of that organisation. The trustee structure comprises employer and employee representatives. A variation is a corporate superannuation fund which is offered by a fund manager on behalf of an employer. With a corporate superannuation fund the contract to set up the fund is arranged between the fund manager and the employer. The benefit of an employer/corporate superannuation fund is the professional management for both the operation of the fund as well as investment management. Members may also gain cheaper and easier access to insurance through group policies. In some cases, employers may pay additional contributions or pay the fees for the operation of the fund. However, this may be offset by restricted investment choice, lack of control and a loss of some potential tax benefits.
Self managed Super Funds (SMSFs)
An SMSF requires the fund to satisfy certain basic conditions, including the following:
- the fund must have no more than 6 members, or less than 5 members before 1 July 2021 (members include minors and persons who are currently receiving pensions from the fund)
- all members are trustees (or directors of a corporate trustee) and there are no other trustees, unless the fund has only one member and
- no member of the fund is permitted to be an “employee” of another member (or associate) unless the members concerned are “relatives”
Trustees of SMSFs are prohibited from receiving remuneration for their duties as trustees but may be remunerated for providing duties and services in another capacity provided certain conditions are satisfied. As trustees and members of an SMSF, they participate actively in the operation of the fund in all respects. That is, they have full responsibility for the fund’s management, investment and general administration functions, usually with the assistance of one or more external service providers (e.g. accountants, tax agents, investment advisers or managers). The trustees can choose any investment for the fund provided it fits within the fund’s documented investment strategy and does not breach any applicable SIS rules. An SMSF’s investments can include direct and managed investments, thus giving the trustees a wide choice of investment options. The benefit of an SMSF is direct control, a wider investment choice, greater control over taxation benefits and potentially lower fees for larger balances. These advantages may be offset by the time required to manage the fund, the personal risks of acting as trustee and lack of expertise.
Small APRA Super Fund
Small APRA funds are superannuation funds with no more than 6 members, or fewer than 5 members. The trustee must be a professional trustee approved under the SIS Act, rather than the fund members. The fund is also regulated by APRA rather than the ATO, which regulates only SMSFs.
A small APRA fund may be appropriate in situations where a person would otherwise choose an SMSF but the person:
- does not qualify to be a member of an SMSF (e.g. an arm’s length employee of another member)
- does not qualify to be a trustee (e.g. a person who is bankrupt or a non-resident), or
- does not want to accept the responsibility of trustee.
A small APRA fund can still allow members to invest in assets not normally available in a managed fund although the trustee’s approval is required. It also provides the same taxation advantages as an SMSF. However, fees and other expenses may be higher due to having an external trustee structure. The authorised trustee is responsible for the operation of the fund but may take into consideration directions given by members. The benefit of a small APRA fund is wide investment choice and greater control over taxation benefits without taking on trustee responsibilities. These advantages may be offset by some loss of control and higher fees than an SMSF.
MySuper funds are not a type of super fund but are a default super fund account for people who don’t choose their own super fund when they start a new job. They are designed to be simple, low cost and easy to compare, to protect the retirement savings of members from being eaten away by fees for services or advice they don’t want or need. MySuper can be offered by retail, industry and corporate funds to members in accumulation phase (pre-retirement), but not as defined benefit funds or super pension accounts for retirees. SMSFs are not permitted to offer MySuper products. Superannuation funds which choose to offer MySuper products must offer a product with a single investment strategy and a standard set of fees available to all prospective members. However, employers may be able to negotiate with funds to obtain a discounted administration fees for their employees.
Details of tailored MySuper products and discounted administration fees must be reported to APRA and be separately published by the fund trustees. A MySuper product is basically intended to be a simple, cost-effective product which better serves the interests of the members who want the trustee to be responsible for making decisions about their superannuation. These products have common characteristics, and they have a single, diversified investment strategy. MySuper fund trustees are required to provide a targeted rate of return and level of risk that they have determined is appropriate for MySuper members.
This article is for general information only. It does not make recommendations nor does it provide advice to address your personal circumstances. To make an informed decision, always contact a registered tax professional.