Compliance, Documentation

Statement of intent can cause issues

SMSF statement of intent

Advisers should be wary that simple SMSF asset purchases can lead to compliance breaches if clients communicate their motivation for the transaction.

An SMSF technical specialist has warned advisers that a statement of intent made by clients, even casually, could lead to conventional investments triggering problems with the sole purpose test.

To this end, Heffron technical and education services director Leigh Mansell suggested the purchase of a residential property using an SMSF could lead to compliance issues, depending on what the trustees have communicated to their adviser.

Mansell pointed out potential problems would not be detectible on the surface because the trustees could acquire the property from an unrelated party and lease it on commercial terms to an unrelated tenant, all in accordance with the fund’s trust deed and investment strategy.

“You might look at [an arrangement like] this and say: What’s wrong with that? People do this all the time, don’t they?’” she told delegates at the Heffron Super Intensive Day 2022 held in Sydney recently.

“But what if [the client] said to you in some sort of conversation: ‘We couldn’t afford it, but it’s our dream home. We’d really like to buy it ourselves, but we can’t. We’ve got a bucket of money sitting in our fund so why don’t we get the fund to buy it, we’ll lease it to the tenant and then later on, in a couple of years’ time when we’re retired, we’ll lump sum it out as a benefit payment.’ Now that would be problematic.”

According to Mansell, an auditor actually qualified a client for a compliance breach of the sole purpose test several years ago as a result of this type of scenario.

“[You might think this is] a little bit far removed. It’s hard to detect, but if your client says to you this is what I want to do and why, little alarm bells should go off in your head [and you need to tell them] ‘no, it’s a sole purpose breach, you can’t do that’,” she said.

“It’s been done [lots of times, but] you don’t want to be advising your clients to do it, you don’t want to be a party to your client [doing it].

“So what you want to say to your client is you’re going to have a breach of the sole purpose test if you do that. So you don’t want to be rubber stamping it saying ‘yeah, yeah it’ll be right’. You basically want to do the opposite.”

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