The $620,000 SMSF request and a nephew's townhouse
Margaret, 78, has $620,000 in a retail superannuation account that has been in pension phase for six years; she draws the 4% minimum, about $24,800 a year. Priya, her adviser, works for a licensee owned by the platform that holds Margaret's super. Margaret wants to establish an SMSF, roll over the full balance and use $450,000 of it to buy a townhouse unit from her nephew, who she says has offered 'under market' terms. Her daughter Lyn has emailed asking to be present at all meetings because Margaret 'gets confused with numbers'. Margaret tells Priya not to discuss anything with Lyn, and signs a scope-of-advice document she has not read. Priya's file note reads only: 'Client wants SMSF - discuss costs.' The practice pays advisers an annual bonus calculated on growth in funds under advice. Margaret is a retail client.
1. Using Margaret's figures, assess whether the SMSF and the property purchase can satisfy the best interests duty and the obligation to provide appropriate advice. Identify the specific legal obstacles to the purchase.
Read the worked answer
That the arrangement is legal does not make it appropriate. Work the numbers first.
Cost. An SMSF holding $620,000 typically costs $6,000-$9,000 a year in accounting, audit and ASIC levies before investment fees - roughly 1.0-1.5% of the fund, materially more than a retail account.
Concentration. A $450,000 residential unit would be 73% of the fund. Net rent is likely to be 2.5-3%, around $12,000, against a $24,800 minimum pension, so she would have to sell the property or run the fund's cash to zero.
Legality. Section 66 of the SIS Act prohibits an SMSF acquiring an asset from a member or a relative unless it is a listed security, or business real property acquired at market value. A residential unit from her nephew is neither, so the purchase is prohibited regardless of price. She also could never live in it, or let a relative live in it, without breaching the in-house asset and sole purpose rules. Borrowing through a limited recourse arrangement would not cure this.
On these facts the SMSF is not in Margaret's best interests and the strategy is not appropriate. The file note would not evidence the analysis s 961B requires, and the section 66 breach alone means the plan cannot be implemented as described.
2. How should Priya handle the bonus arrangement, the signed scope document and Lyn's request before any further work is done?
Read the worked answer
Three issues must be separated.
Conflicted remuneration. An annual bonus calculated on growth in funds under advice is asset-based remuneration, and payments to a licensee or adviser in connection with advice to retail clients are banned under Part 7.7A of the Corporations Act. Priya cannot receive or accept it in relation to Margaret. She must escalate it to compliance, ensure Margaret's arrangements do not generate it, and disclose the practice's platform ownership in the Financial Services Guide and in the advice.
Scope and consent. A scope document signed without being read is not evidence of client agreement. Priya should re-document Margaret's objectives, financial situation and needs in her own words, disclose all fees in writing, obtain written consent to the ongoing fee deduction (s 962G) and give her time to consider. If Margaret still wants the SMSF, the appropriate response is to decline that part of the scope in writing, explain why, and offer a lower-cost alternative such as retaining the existing account or moving funds.
Lyn and capacity. Priya cannot discuss Margaret's affairs with Lyn without consent. But a request to withhold information, a comment that Margaret 'gets confused with numbers', and a related-party property deal are classic elder financial abuse indicators. Priya should screen capacity (can Margaret understand, reason about and communicate the decision?), encourage her to bring Lyn or another support person, record the discussion, and decline to act on instructions that cannot be shown to be Margaret's own. A threatened complaint does not change that obligation.