Financial advisers have been warned about placing too much emphasis on the tax advantages of self-managed superannuation funds, with Colonial First State head of technical services, Craig Day highlighting the possibility of sole purpose test breaches according to section 62 of the SIS Act.
Speaking on a live webinar at the 2021 SMSF Association National Conference, Day said that the context of SMSF advice needs to be directed towards retirement, not current tax advantages.
“When you’re pitching your advice or terming your advice in your statement of advice, make it about retirement,” Day said. “Don’t oversell the tax benefits because as soon as you start to make it all about tax then it’s no longer about retirement and you potentially open yourself up to accusations of breaching the sole purpose test.”
Selling clients on the tax benefits of superannuation is a “natural” thing to do for advisers, Day explained, because tax effective planning goes to the heart of a financial planners value proposition.
However, by focussing on the tax benefits as the primary purpose of the trustee decisions and framing the SMSF advice provision around this, Day said the adviser is putting themselves and the trustee at risk.
“What you’re doing [then] is a current day benefit,” he explained. “You’re not contributing to super to provide retirement benefits, you’re doing it to provide some sort of current day tax purpose, which could potentially be a breach of sole purpose.”
The tax benefits will obviously be a core part of any discussion about SMSF advice, Day said, but that doesn’t mean they need to be put on a pedestal as the primary purpose of the strategy.
“Bring it back in, always focus your advice around the provision of retirement benefits, [then say] ‘and by the way, you’re company will also get a tax deduction out of this’ as an incidental benefit.”
Court cases have confirmed that incidental benefits are allowable, Day explained, but the courts have also made it clear that the benefit “can’t be incidental if the purpose was to obtain that benefit”.
“So just don’t oversell those tax benefits,” he said, “because it’s got to be all about retirement.”
The “carrot” to induce people to save for their retirement is tax concessions. Without them it would be far harder to convince people to invest in a structure that, in the normal course, is locked until age 60.
So the tax concessions are central to the superannuation proposition.
The “stick” is the very strict regulatory requirements that surrounds super.
So you end up with a complicated system that needs to be explained and, the discussion must be balanced and, include the promotion of awareness that the tax concessions mean the structure is subject to onerous regulation. Overstating the carrot or the stick is not helpful.
As to SMSFs, they are a structure and the tax concessions afforded are no different to APRA funds. If an adviser promotes tax benefits as the number one value proposition for super investing, the sole purpose test ‘Damocles sword’ hangs there also.
The SPT is truly overused by over zealous compliance people.