Paying a member’s financial advice fees out of a super fund
An issue that regularly arises in relation to the provision of financial advice is whether the cost of that advice can be paid out of a superannuation fund of which the client is a member.
That superannuation fund will typically be a self-managed superannuation fund (SMSF) of which the client is a trustee (or a director of a corporate trustee) and a member. For those funds the client will have some degree of control over the decision whether to pay the fees.
There might also be situations where the advice fees are sought to be deducted from an industry or retail fund of which the client is merely a member. Those funds will have their own internal procedures for determining when they will pay fees for advice given to a member – which could be more limited than what the law permits.
The primary question to be considered for each type of fund is whether the law actually does permit such payments in the first place.
The relevant provisions of the law
The financial services laws do not expressly regulate how financial advice can be paid for. While they are generally drafted on the presumption that the cost of providing a financial service will be paid for by the client receiving the service, there is no express prohibition on payment being made by a third person.
However, where that third person is the trustee of a superannuation fund, a related issue arises of whether such payments are permitted under the “sole purpose test” that applies to superannuation funds.
The sole purpose test is set out in section 62 of the Superannuation Industry (Supervision) Act 1993 (“SIS Act”) and requires the trustee to maintain a superannuation fund solely for one or more “core purposes” and one or more “ancillary purposes”.
These purposes relate to providing benefits to each member:
- on retirement;
- on attainment of a particular age;
- on or after their death; or
- on account of ill-health.
It should also be noted that section 99F of the SIS Act makes it clear that the trustee of a superannuation fund may bear the cost of advice given to members[i]. It is possible to infer from this section that Parliament intends that the bearing of the cost of financial advice in relation to a member of the fund by a superannuation trustee is the provision of a benefit that is consistent with the sole purpose test.
Paying for a member’s financial advice as a permitted benefit
The Explanatory Memorandum for the Superannuation Industry (Supervision) Bill 1993 does not shed further light on the interpretation of section 62 and there has been no judicial consideration of the payment of member advice fees by superannuation trustees.
The view of the Australian Prudential Regulation Authority (“APRA”) on the matter was set out in a Circular issued in 2001[ii]. Relevant parts of that Circular are found in paragraphs 41 and 43 to 44.
Paragraph 41 states:
It is open to trustees to develop features of their fund which add value to, or differentiate it from, other funds. For example,… financial advice programs, targeted at fund specific issues such as benefit features (including insurance options, the making of binding death benefit nominations etc) or investment choices offered in the fund, may be appropriate. However, fund sponsored programs, including financial planning services, which are targeted at broader, non-superannuation savings and investment opportunities, products or services, such as investment or tax advice and health insurance, are inappropriate.
Paragraph 43 states:
Financial planning is now a service which many trustees are considering offering to members. As noted in paragraph 41, if the service is aimed only at a member’s interest in the fund, such services would generally fall within the sole purpose test. If, however, broader advice is offered, it would be inappropriate for the cost to be borne by the fund…
Paragraph 44 states:
… where the costs are charged to the members’ balances in the fund, trustees must ensure that the services relate exclusively to fund matters.
In other words, the Circular is saying that having a superannuation trustee pay for a member’s financial advice:
- in relation only to the fund is consistent with the sole purpose test; and
- in relation to non-superannuation matters is not consistent with the sole purpose test.
It is unclear whether APRA still stands by this guidance. The Circular no longer appears on the APRA website but, correspondingly, there has been no public statement of withdrawal or disavowal of the Circular from APRA.
The views of the Commissioner of Taxation in relation to the sole purpose test as it relates to SMSFs were set out in a Ruling issued in 2008[iii]. It does not specifically deal with the payment of member advice fees by the trustee. Instead, it details examples relating to the types of investments that can be made by a fund.
However, it does offer some conceptual insights into the ATO’s interpretation of the sole purpose test. For example, a breach of the sole purpose test is more likely if a “benefit is provided by the SMSF to a member… at a cost or financial detriment to the SMSF.”[iv]
“…, it is not consistent with the sole purpose test for a trustee to apply funds held by the trustee in paying fees charged by an adviser to consider, or re consider, how best the member may order his or her financial affairs generally or may best make provision for post-retirement income.
It follows that the nature of the advice that may properly be paid for from a superannuation account is limited to advice about particular, actual or intended superannuation investments. This may include such matters as consolidation of superannuation accounts, selection of superannuation funds or products, or asset allocations within a fund. It would not include broad advice on how the member might best provide for their retirement or maximise their wealth generally. Any practice by trustees of allowing fees for these latter kinds of financial advice to be deducted from superannuation accounts must end.
As (in my view) this is what the law already requires, no further amendment is necessary.”
To some extent, this statement is simply the personal view of the Commissioner and no sources in support of these conclusions were quoted. However, the Royal Commission examined the issue in some detail based on a considerable body of evidence and the Commissioner’s views should be regarded as being influential, particularly given that they accord with the views expressed by APRA and the ATO.
The treatment of financial planning advice
It is clear from the above that in order to meet the sole purpose test the advice provided must relate to the fund from which the fees are being deducted.
For example, the costs of advising a member on:
- establishing or updating a binding death benefit nomination; or
- which investment option offered by the fund was suitable for the member,
would relate to the fund from which the fees would be deducted.
However, the client’s broader financial and estate planning strategies are not confined to a particular fund or to superannuation death benefits in general – even if the client’s estate is likely to include the proceeds of a superannuation death benefit[vii]. For that reason, such costs would come within the range of services that are outside of the sole purpose test.
Consequences of breaching the sole purpose test
Complying with the sole purpose test is the primary responsibility of the trustee of the superannuation fund and a contravention is a civil penalty provision which could also lead to the loss of the fund’s concessional taxation status.
However, if an adviser does render an invoice to the client’s superannuation fund for financial planning advice that does not meet the sole purpose test then the adviser should be aware that:
- the adviser and his or her licensee might be in breach of the best interests duty[viii] or its conflicts of interests policy[ix];
- the adviser might be found to be “knowingly involved” in or inducing the trustee to breach the sole purpose test when the trustee pays that invoice – which may lead to legal action by the client or trustee against the licensee or the adviser “down the track”; and
- the licensee might be in breach of the obligations as an AFSL holder to provide financial services “efficiently, honestly and fairly” and to monitor and supervise its representatives[x].
[i] The provision is not of direct relevance as it deals with the circumstances in which the cost of advice may not be borne across all members but must, instead, be charged only to the holding of the particular member to whom the advice is directed.
[iii] SMSFR 2008/2 Self Managed Superannuation Funds: the application of the sole purpose test in section 62 of the Superannuation Industry (Supervision) Act 1993 to the provision of benefits other than retirement, employment termination or death benefits (“SMSFR 2008/2”).
[iv] Paragraph 12 of SMSFR 2008/2.
[v] Technically, the “Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry“.
[vii] Superannuation death benefits do not automatically form part of a deceased member’s estate. However, the estate is a permitted beneficiary of such a payment and strategies can be implemented by a member to ensure that the death benefit is paid to the member’s estate.