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Understanding super & money
By Pam Roberts, Senior Technical Services Manager
During the last year, financial advisers and super trustees have been grappling with a greater focus on the role of financial advice in super and how advice fees are charged. A key area of concern has been the role the sole purpose test for superannuation in determining what fees can be charged out of super.
Under section 62(1) of the Superannuation Industry Supervision Act 1993 super funds must be maintained ‘solely’ for the purpose of providing ‘core’ benefits on retirement and death and/or an ancillary purpose, such as disability benefits. This ‘sole purpose test’ is part of ancient super lore which goes back to the earliest days of super regulation. Its design was to refocus super on its retirement purpose, stop funds being used for tax avoidance and clean up the industry so it could accept compulsory super contributions. The sole purpose test hasn’t changed much in over 30 years and, although there have been strong arguments for a review1, at this stage the Government has no plans to change it.
The basic principle is that any payments from a super fund must meet the sole purpose test, including fees for financial advice. The sole purpose test does not mean that fees for financial advice cannot be charged, instead, for fees deducted from a super account or fund, the purpose of those fees must meet the sole purpose test.
There are some significant problems for advisers trying to navigate the sole purpose test:
At this stage the Government is not intending to change the law to remove or amend the sole purpose test. This may change depending on the findings of the Retirement Income Review due in June 2020.
APRA has said it will release updated guidance on how the sole purpose test applies to financial advice fees by the end of March 2020, but we’re still waiting. Until we receive this guidance, it’s important to work within the law as it currently stands:
1. The only advice fees that can be deducted from super accounts relate to advice about super and the benefits, insurance and investments choices provided through the super fund.
2. There must be a ‘reasonable, direct and transparent connection’ between the advice provided and the benefits provide by the super fund. For example:
The threshold test is, if there is NO connection between the advice service provided and the benefits provided by the super fund, the fees relating to that service cannot be charged through the super fund.
3. Advice fees cannot be deducted from the adviser’s own super account
4. A ‘reasonable connection’ to the benefits provided
This time last year APRA indicated it would release updated guidance on the sole purpose test before the end of 2019. It didn’t materialise. However, the Treasurer will have forced APRA into action by telling Parliament that APRA intends to release draft guidance for comment by the end of the first quarter of 2020.–– We would hope that APRA will take a modern view of the application of the sole purpose test to financial services in super and recognise the role financial advice has in benefiting consumers.
It would be a rare thing that laws designed to defeat tax avoidance and employee exploitation in a previous century would still hold their own in a radically changed industry many times its 1980’s size. The sole purpose test in super definitely has the feel that it should have gone out with shoulder pads and mullets. It imposes an unnecessary restriction on trustees providing services and benefits that are outside the narrow parameters of retirement and death benefits. For advisers it forces unnecessary char ging complexity and restrictions on advice. Why shouldn’t services assisting clients with the financial aspects of aged care and Centrelink be funded through superannuation? If a super fund provides financial protection in case of death, why shouldn’t the fund be able to facilitate the full range of advice on estate planning?
If you have any questions, or would like more information, please contact the IOOF TechConnect team on 1300 650 414.
 For example, here are a number of questions as to whether the sole purpose test is still relevant:– If the Government legislated an objective for super, why do you need the sole purpose test?– The super fund infrastructure is already used for savings other than super, for example, the First Home Super Saver.– Super is just one part of an integrated retirement income system, so why shouldn’t super funds be able to operate within this system without being restrained by the sole purpose test?
 Treasurer Josh Frydenburg’s written answer to question 270 tabled in House of Representatives 4 February 2020.
 Final Report Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry Volume 1 p. 240 released 1 February 2019. More information