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9 May 2024

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Sole purpose test needs level playing field

Imagine this scenario: SuperConcepts would like to announce a great deal with one of Australia’s leading online retailers. Available for a short time only, individuals who join an SMSF administered by SuperConcepts will receive 20,000 Shopper Points worth $550 for only $100. And the cost can be deducted from your SMSF.

It wouldn’t take long for the regulators to remind us about Section 62 of the Superannuation Industry (Supervision) Act (SIS Act) that details the sole purpose test. The ATO defines this test as:

"Your SMSF needs to meet the sole purpose test to be eligible for the tax concessions normally available to super funds. This means your fund needs to be maintained for the sole purpose of providing retirement benefits to your members, or to their dependants if a member dies before retirement."

Super is only for "providing retirement benefits". Yet there is an offer in the market right now that has created such dizzying confusion that the entire SMSF sector has vertigo.

Inducements are not for retirement

Clarity is needed around the sole purpose test for super funds as these types of marketing inducements seem to be gaining mass publicity and momentum. Our clients are asking for further guidance on what is now considered to be appropriate and enforceable in order to avoid breaches and ensure a level playing field.

We are not saying a breach of the sole purpose has occurred or is occurring, but we do believe clarification is needed for where the line can be drawn.

Under what circumstances is a fund permitted to offer inducements with a quantifiable financial value to attract new members if the inducement is being funded by existing members?

There is also the issue of members receiving a personal benefit from the assets of a fund before retirement, which arguably is not an incidental benefit because it has influenced the trustee’s decision to enter into the arrangement.

Over the years we have seen many examples of SMSFs breaching the sole purpose test because a member or related party has received a personal benefit from the fund assets before retirement.

Previous regulator clarification

In 2002, APRA and the ATO issued a media release confirming that:

“The investment of superannuation fund monies in particular schemes was inconsistent with the 'sole purpose test' for regulated funds. The particular schemes that fail the test offer non-superannuation shareholder benefits and the cost of the scheme is borne by the fund."

“In the case of trustees that offered Coles Myer Discount Card shares as an investment option and participated in a scheme whereby members were provided with the relevant discount card, APRA and the ATO will take no action provided trustees agree that they will not participate in any future scheme:

  • by which an advantage or benefit (not being a superannuation benefit within the meaning of the SIS legislation) is conferred on a beneficiary of the fund of which they are trustee or on any other party; and
  • where there is an identifiable cost to the fund arising from the conferring of the advantage or benefit, whether a direct charge or an indirect cost such as the foregoing of income which would otherwise be derived by the fund.”

Given the emergence of new similar arrangements, the SMSF sector needs to know whether this position has changed and, if not, under what circumstances can a fund offer a financial inducement to attract new members.

The issue goes beyond the sole purpose test. The SMSF sector also needs to understand how this kind of inducement-marketing works in relation to the Royal Commission’s anti-hawking recommendation.

Our clients see a danger that some in the superannuation sector get caught up in breaches by seeing these new inducement offers that appear acceptable.

We’re hearing real concerns that if everyone in the industry is not on a level playing field, then the superannuation sector could become unbalanced with unforeseen consequences. And that’s not good in a superannuation sector set up for fairness and equity to all Australian retirees.

 

Adrian Urquhart is CEO of SuperConcepts, a sponsor of Cuffelinks. This article is for general information purposes only and does not consider any individual’s investment objectives.

For more articles and papers from SuperConcepts, please click here.

 

6 Comments
Tony Reardon
March 14, 2019

Some companies offer benefits to shareholders. If the trustees of an SMSF hold these shares for the fund, they are entitled to the benefits. There is no direct cost to the fund and no obvious indirect cost (i.e. it is a reasonable shareholding), so it is difficult to see the objection to taking up the benefits. As an example one of the major banks offers reduced fees on credit cards to shareholders.

When it comes to major superannuation funds, one could argue that they have a strong duty to minimise expenses and that much of their marketing might fail a test of providing retirement benefits to existing members.

Peter C
March 14, 2019

It's an interesting question. As a long standing Australian Super member, I was a bit peeved that the same offer was not made to me. It's quite common amongst most businesses in Australia that in chasing new customers they forget about their long standing ones. Having said that I choose to stay with Australian Super because their fees are low and their long term performance is very good. In my eyes long term net performance is what matters, everything else just strokes one's vanity and ego.

Having met members of that board at the member briefing, I would suggest, decisions would have been made only after I's were dotted and T's crossed. They clearly would have had sought and received advice on this issue, perhaps even from the regulators, which may explain the regulators response.

I am surprised Australian Super has done this, simply because they are increasing their member numbers anyway.

Who knows perhaps it's a case of sinking the competition boot in to the banks, AMP and IOOF at a time when the retail funds are at their weakest?

Woody
March 14, 2019

Industry Funds run only to benefit members, including AFL & NRL
Sponsorships, questionable investments, advertising campaigns to berate the retail industry, who pays for this?? Members I would suggest!
Not sure any of this meets the sole purpose test!
Let’s have a fair and balanced discussion.

Jimmy
March 14, 2019

Seems to be another example that the Industry Super Funds can do no wrong....

It's ironic (or is hypocritical the word I'm searching for ??) that there was much furore over the potential of banks to be offering incentives to employers to use the bank's aligned super fund as their default fund for employees.....yet there's apparently nothing wrong with bribing people with frequent flyer points.

And it also appears that the Industry Super Funds have learnt something else from the Bank's (apart from vertical integration....) and that's to only give deals to new customers at the expense of existing customers....

Jack Upton
March 14, 2019

Spot on Jimmy. Two points you make have been a bane of contention for me for thirty years.

Geoff
March 13, 2019

Referring obviously to the Australian Super / Qantas points issue. Good question. Qantas does not give away points - they are bought by companies who then use them for various purposes, including giveaways to members.

20,000 points per new member costs Australian Super something, that's for sure, so is it acceptable?

You can, no doubt, attempt to make similar arguments about any other cost of business borne by a super fund, however - does it meet the sole purpose test?

The other question is, given the wash up after the royal commission - why does Australian Super feel the need to be advertising for new members at all? They're already flocking there in their droves.

 

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