Financial planners need to include legislative and tax risks in their statements of advice to clients.

Advisers are risking litigation if they recommend  to their self-managed superannuation fund (SMSF) clients, a specialist lawyer has warned.

Townsends Business & Corporate Lawyers principal Peter Townsend said that “if I were a financial planner wanting to cover my derrière, I would be ensuring that my SOA (statement of advice) set out these risks very clearly and that my client signed off on them before agreeing to process or implement the transaction for them”.

“If no SOA is being used, then a letter of advice and sign-off should be used.”

The background to Townsend’s warning is that the minutes of the National Tax Liaison Group (NTLG) superannuation meeting in June postulated that a related party was not obliged to charge their SMSF a commercial interest rate on a loan because there was no obligation in the legislation to charge any interest rate at all.

The Australian Taxation Office (ATO) had already ruled that an interest rate favourable to the fund was not in breach of the obligation in section 109 of the Superannuation Industry (Supervision) Act 1993 for arms-length dealing because that section applied only to arrangements that favoured the other party, not arrangements that favoured the fund.

“While there is now advice in the market that low-interest loans to SMSFs are ‘kosher’, advisers should be very cautious,” Townsend said.

“Low-interest loans effectively circumvent the contribution cap regime by transferring value into the fund.

“It’s very surprising that the ATO has so easily dealt such a blow to contribution caps without considering the wider ramifications. It’s worth remembering that NTLG minutes are not binding on the ATO. The chaps in Canberra can change their minds yet.”

Also, the interpretation was based on a technical review of the law on gearing, in particular the ruling on contributions, and not on any wider issues. The value transfer may yet come up for consideration under Part IVA of the tax legislation.

“Related-party loans may be easy to arrange and administer, but they must not be treated with cavalier disregard for the important fundamentals of the superannuation law relating to borrowing,” Townsend said.



By Philippa Yelland

Philippa Yelland

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