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Documentation, Superannuation

Expense duty will impact SMSFs

best financial interests

An understated budget change may require SMSF trustees to account for every dollar spent by their fund under an expansion of best interest duties.

Trustees may be required to account for some expenses incurred within their fund under proposed changes aimed at ensuring the best financial interests of beneficiaries are protected, according to an SMSF technical expert.

Heffron technical services manager Leigh Mansell said a brief note in the budget papers about modifying Superannuation Industry (Supervision) (SIS) Act covenants to clarify that super trustees must act in the best financial interests of beneficiaries did not appear to affect SMSFs, but exposure draft legislation has indicated the opposite.

“What the measure and exposure draft legislation is proposing to do is to expand those covenants to make it clear what is meant by best interests when dealing with beneficiaries,” Mansell said during a Heffron webinar today.

“Various reports have noted over the past few years that when looking at best interests of beneficiaries in the SIS Act covenants there appears to be a lack of clarity as to what that means, and they want to make it clear that it relates to best financial interests of a beneficiary.”

She said the changes were understandable in relation to Australian Prudential Regulation Authority-regulated funds, but they were not limited to those funds and would apply to trustees of any type of super fund.

The explanatory memorandum to the draft legislation referred to expenses related to sponsorship, corporate entertainment and advertising and the need for trustees to justify and demonstrate how those expenses were incurred in the best financial interest of the beneficiaries of the fund, she noted.

She said the changes would prohibit payments if they were considered unsuitable expenditure and trustees needed to be cognisant of what they spend their money on and whether they get what they pay for.

“The point for SMSFs is if I think I am paying for picking investments or making an improvement to property, am I paying the right amount for that?” she said.

“They may want to consider getting a couple of quotes and making sure they are making best use of the fund’s money so the best financial interest duty is met going forward.”

She said examples of how an SMSF trustee may breach these proposed changes were hard to provide as existing SIS regulations already prevented a range of behaviours, but she expected more information to be provided ahead of the close of consultation on the changes on 24 December.

“So if a fund wanted to make a charitable donation, as advisers we would stop them because the SIS regulations won’t let them do that and the sole purpose test states the fund can only do things for the benefit of members or beneficiaries,” she noted.

“This draft legislation will become effective after [passing through parliament and] receiving royal assent and is interesting to see because it shows how issues that affect the superannuation industry as a whole, including those raised at the Hayne royal commission, can still affect SMSF trustees.”

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