Charging fees within superannuation
In April 2019, ASIC and APRA released a joint letter to superannuation trustees calling for stricter governance in relation to fees deducted from members super account to third-parties (e.g. financial advisers). You can read the full letter here and we’ve pulled out key information below.
Is the deduction consistent with the sole purpose test?
The sole purpose test (section 62 of the Superannuation Industry (Supervision) Act 1993) means that only costs associated with advice that relates to the member’s superannuation and insurance obtained through superannuation may be deducted from the member’s superannuation account.
Advice that relates to investments outside of superannuation, for instance, cannot be funded from superannuation account deductions. There is a range of data points accessible to trustees that would suggest the deductions made may be inconsistent with the sole purpose test (for instance, the value or frequency of the deduction for the fee).
Sole purpose test
The trustee cannot operate the fund in a manner that is inconsistent with the ‘sole purpose’ test contained in s 62(1) of the SIS Act. It provides that the trustee of a regulated superannuation fund must ensure that the fund is maintained solely for one or more of what are called the core purposes, or alternatively one or more of the core purposes and ancillary purposes.
A core purpose is to maintain the fund to provide benefits for each member of the fund on or after:
- the member’s retirement from any business, trade, occupation or employment;
- the member’s attainment of a prescribed age;
- the earlier of the member’s retirement from any business, trade, occupation or employment or the attainment of a prescribed age, or
- the member’s death, if the death occurred before they attained a prescribed age or retirement, where benefits are provided to the member’s dependants or legal representative.
An ancillary purpose is to provide benefits for each member on or after:
- the termination of the member’s employment with an employer who, at any time, had made contributions to the fund for that member;
- cessation of employment due to ill health;
- death of the member after retirement where benefits are paid to the member’s dependants or legal representative;
- death of the member after attaining a prescribed age where the benefits are paid to the member’s dependants or legal representative, or
- other ancillary benefits approved in writing by the Regulator.
Whether a fund complies will depend on the facts of each case and will be assessed by the objective facts, not the subjective views of trustee, or in the case of the corporate trustees, the directors.
The test has been explained in the following terms:
… it may be that there are isolated incidents which, viewed in the overall context of the way in which a superannuation fund is being maintained, are so incidental, remote or insignificant, that they cannot, having regard to the objects sought to be achieved by the Act, be regarded as constituting a breach of the sole purpose test. Such incidents will be rare. The legislature, by adopting the “sole purpose” test, has expressly determined that a strict standard of compliance should be adhered to. Under the Act, the test requires more than the presence of a dominant or principal purpose in the maintenance of a superannuation fund — it requires an exclusivity of purpose commensurate with that purpose being the “sole purpose”.
Also take into consideration Standard 7 of the FASEA Code of Ethics which requires:
The client must give free, prior and informed consent to all benefits you and your principal will receive in connection with acting for the client, including any fees for services that may be charged. If required in the case of an existing client, the consent should be obtained as soon as practicable after this code commences. Except where expressly permitted by the Corporations Act 2001, you may not receive any benefits, in connection with acting for a client, that derive from a third party other than your principal. You must satisfy yourself that any fees and charges that the client must pay to you or your principal, and any benefits that you or your principal receive, in connection with acting for the client are fair and reasonable, and represent value for money for the client.
This standard also requires that all fees and charges payable to you or your principal, and benefits you or your principal receive for acting for the client, are fair, reasonable and represent value for money for your client. This is an integral part of your duty to deal fairly with your client and in his or her best interests.
Geoff ensures that our financial advisers follow their compliance duties and legislation so that our clients’ best interests are always at the heart of what we do. Read his full bio here.