There are rules around the type of financial advice a self-managed superannuation fund can pay for. Are you getting it right?
The government recently announced a raft of changes it wanted to see among industry and retail super funds (funds other than SMSFs) – prompted by the catastrophic losses suffered by Shield and First Guardian victims.
The prevailing wisdom in Canberra is that the trustees of these large super funds should have done more to protect members by better vetting the investments in the first place and limiting how much of any member’s super balance could be invested in a single investment.
And – going one step further – by capping the amount that financial advisers can charge in fees against super balances held in these funds.
The regulator of those funds, the Australian Prudential Regulation Authority, has taken that to heart, told the funds to get moving and, as a result, changes are already flowing through the system.
The types of funds mostly favoured by financial advisers (often called retail funds or platforms) are already getting more serious about the caps they already have on advice fees or are introducing new ones.
So what does any of this have to do with SMSFs? Absolutely nothing in some ways – the cap only applies to APRA-regulated funds, not SMSFs. But that doesn’t mean it’s open slather when it comes to advice fees in SMSFs, and it’s a good time to review the rules while there’s so much fuss about fees in other sectors.
What advice can an SMSF pay for?
For a start, all super funds (including SMSFs) can only pay for things that genuinely relate to the fund – not the members personally – and are consistent with super’s “sole purpose test”. This test is the holy grail of superannuation – it’s the overarching rule that essentially says everything a super trustee does should be geared towards helping people boost their super savings for retirement.
But isn’t all advice to an SMSF owner about exactly that? Not necessarily.
Many financial advisers cover all sorts of things in their advice – personal as well as super investments, cash flow and budgeting support, insurance, estate planning and more. Not all of this can be paid for from the SMSF.
For example, it’s fine for the SMSF to pay for advice to the trustees on the SMSF’s own investments, regular monitoring and reporting on those investments and implementing any changes.
It would also be fine for the SMSF to pay fees associated with getting advice on the insurance policy it should take out for one of its members (although advice to the member on how much cover they should have is probably exactly that – advice to the member, not the trustee).
But many things feel like SMSF advice and aren’t justifiable as an SMSF expense.
For example, what about personal advice on whether a member should make extra contributions to super? Or start a pension? What should a member include in their will about their super? All of these drift into personal advice, not advice to you in your capacity as trustee of your SMSF.
That might be different if someone in the fund had already decided to start a pension, or had died and you (as trustee) needed advice on how to implement that in your SMSF. Those are legitimate SMSF expenses. But you can see the challenge – it’s not a bold black line.
Splitting advice costs
Additionally, many advisers don’t charge for these services individually – they might charge a monthly retainer (a percentage of assets or fixed amount) to cover everything.
So, it’s important they and their client look at the overall scope of advice that’s likely to be provided over the year and agree on a reasonable split between the SMSF and the client personally rather than assuming the SMSF should pay all of it.
The split should also be reviewed each year. Just because sharing the overall monthly fee 50/50 was reasonable a few years ago doesn’t mean it’s still reasonable today.
In fact, it’s equally important to consider this question from the other angle: is the SMSF paying for all the services it’s receiving or is the member paying for some of them?
Someone with an adviser who covers both their SMSF investments and a range of personal advice issues shouldn’t assume the easy solution is to pay 100 per cent of the advice fees personally.
Paying costs the SMSF should incur risks having the fee treated as a contribution or the super fund’s income. Either can be a disaster, and could result in extra taxes.
There really is a Goldilocks zone – the SMSF should pay for all the services that relate to the fund, not a dollar more and not a dollar less.
Advice fees and GST
There’s another quirk about advice fees when it comes to SMSFs versus other super funds, and that’s GST.
Most SMSFs don’t have to be registered for GST. But if they choose to register, it’s possible to claim back some of the GST paid on advice fees that relate to managing the fund’s investment portfolio (including both the advice and actually facilitating the investments).
For example, an SMSF paying $15,000 plus GST per year in advice fees would also pay $1500 in GST. If it’s registered for GST, it’s allowed to claim back 75 per cent of that cost ($1125) – either reducing its annual tax bill or adding to its tax refund.
Believe it or not, this is one area where SMSFs have a distinct edge over other types of super fund. Other funds can’t claim back the GST on adviser fees for quite a technical reason. GST can only be claimed back on fees charged for services to the trustee of the fund.
In an SMSF, that requirement is easily met – advice about how to invest the fund’s assets is given directly to the trustee of the fund. In large funds, though, the client receiving the advice is just a member of the fund – and they’re using it to decide which of the various investments available to them within that fund will be used for their super. Technically, this isn’t the same as advising the trustee of that fund.
The bottom line is that while the current fuss about advice fees doesn’t relate to SMSFs, it’s still worth thinking about how to get things right and optimise your tax when it comes to advice fees.
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