Are SMSFs covered by the government guarantee?
SMSFs are covered by the government guarantee as a separate entity.
While self-managed super funds (SMSFs) are a good way to save for your retirement, there are certain risks involved. SMSFs differ from other types of superannuation funds in that members are also the trustees and are responsible for managing their investments. They must also comply with the associated legal and tax laws that come with managing a super fund. One reason many Australians are taking up this model of super investment is because it gives them the power to choose how the funds are invested, instead of relying on fund managers to make investment decisions on their behalf.
What are the risks?
Under the Financial Claims Scheme (FCS), also known as the government deposit guarantee, an SMSF is considered a single entity and therefore only entitled to the recovery of up to $250,000 regardless of the total sum held or the number of people invested.
SMSFs are exempt as authorised deposit-taking institutions (ADIs) under the FCS and as such are not insured in the same way as your typical savings account. Regular savings accounts are typically covered under the Government Guarantee.
The Australian Government’s Financial Claims Scheme
The FCS was created in 2008 in the wake of the global financial crisis and has since been amended to reflect the returning strength of Australia's financial institutions.
The Australian Prudential Regulation Authority (APRA) is responsible for administering the FCS.
It provides protection for deposits made at authorised deposit-taking institutions (ADIs), offering protection for each “account holder” in the remuneration of up to $250,000 in the case of insolvency. APRA does not consider SMSFs as ADIs under the FCS – instead SMSFs are considered single “account holders” and as such are only eligible for cover up to $250,000 collectively.
An “account holder” as defined by APRA includes:
- An individual
- A body corporate
- A body politic
- A partnership
- Any other unincorporated association or body of persons
- A trust
- A superannuation fund (including a self-managed superannuation fund)
- An approved deposit fund
Case study: Jack banks with ING Direct
Jack holds a savings account with a $250,000 balance with ING Direct. He also holds an SMSF with a balance of $1 million with ING Direct. The SMSF has a total of four trustees.
Under the government guarantee, Jack is covered up to $250,000 for his savings account. His SMSF is covered up to $250,000 collectively. This means that if all three trustees hold an equal share of the SMSF, Jack is covered up to $62,500.
Note: In the case of funds that are recognised under APRA, they may be charged a levy to subsidise the government protection of member funds.
APRA determines which banking institutions and other financial entities are covered under the FCS and qualify for the $250,000 protection per “account holder” per ADI.
This means if you have $250,000 with one APRA-approved ADI, and another $250,000 with another, you are eligible for the protection of both sums. However, if you have more than $250,000 with one ADI, only $250,000 is protected.
Why are SMSFs excluded as ADIs from the Australian Government FCS?
SMSFs are deemed ineligible for protection under the FCS by agreement of the Australian Government under the Superannuation Industry (Supervision) Act 1993 – Sect 229.
As such, SMSF regulation doesn’t fall under the jurisdiction of APRA, instead coming under the regulation of the ATO. This carries some pros and cons.
What are the pros and cons of joining an SMSF?
The main benefits and risks of joining an SMSF include:
- Maximum of four members
- All investment decisions made by trustees
- HACK: An individual is entitled to be both a member and a trustee of an SMSF, i.e. become two legal entities
- Trustee flexibility – you choose to self-manage or appoint a corporate trustee
- Minors can be represented by a parent within an SMSF (up to four members total)
- Abundance of information available for interested investors with the ATO
- Compliance to tax law is borne by the trustees
- Financial and legal penalties for breach in superannuation law
- Trustees decide whether to pay for additional insurance, generally at a high premium
- No access to Superannuation Complaints Tribunal
- Not eligible for government financial assistance in case of theft or fraud
- Paperwork nightmare for changeover of trustee
- Additional taxes on contributions that exceed the annual limit as determined by the ATO
- Payment of benefits only permitted when a member reaches “preservation age” – early withdrawal will attract income taxes
When choosing between freedom of investment versus government protection and cheaper insurance, your choice will be governed by your own needs and personal preferences. Take a look at some SMSF options here before deciding.