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Negligence risks surfacing with SMSF property advice

Negligence risks surfacing with SMSF property advice
Miranda Brownlee
11 August 2020 — 2 minute read

An industry lawyer has cautioned SMSF professionals to be careful with the wording of advice for clients making property purchases through SMSFs, with some of the advice in this area not adequately addressing the sole purpose test.

Coleman Greig principal lawyer Peter Bobbin said he is still coming across examples of professional advice where the advice provided has been to purchase the property in the holiday destination that the client wants to retire in.

“[The advice has been] buy the property in your super fund, rent it out, short-term, long-term leasing, doesn’t matter. You want to go live by the beach in another five or 10 years’ time, use your super fund to buy it, possibly even with a limited recourse borrowing arrangement, and when youve obtained the relevant conditions of release and its time to retire, acquire the property from the superannuation fund, youve now got the place you want to live in,” Mr Bobbin explained in a Colonial First State podcast. 

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While from a transactional point of view, Mr Bobbin said this may be acceptable, expressing the advice in this way is a clear breach of the sole purpose test. 

Even where the client was intending to pay the property to themselves as an in-specie benefit, it would still be a breach, he stated. 

“Its still a breach, because its not about the provision of retirement benefits; its about acquiring the property that they want to go and live in,” he explained.

“If you look at each transaction in isolation, its not a problem, but it was contained in a piece of advice that evidenced that the intention of the particular SMSFs members was to acquire a property in superannuation which was in the area that they wanted to live in.”

If, on the other hand, the advice had stated that the SMSF clients were acquiring the property in that area because “theyve done a lot of research in that area because its an area that they know because its an area they are considering potentially retiring in, and because of all the research theyve done theyve found this particular property in their opinion to be a good property to buy for that retirement purpose”, then it may be acceptable, Mr Bobbin said. 

“[The problem is] that it was expressed that this is the way in which you can buy your future retirement home,” he said.

It is vital, he said, that when providing advice on these sorts of circumstances, that SMSF professionals consider the outcomes and objectives of what the client is trying to achieve and whether that relates to the purpose of providing retirement benefits, particularly in the way the advice is expressed. Otherwise, it could expose the client to significant breaches.

“If youre the professional involved in developing that, then unfortunately, there could be quite a significant negligence claim that may be brought. Thats quite ugly particularly where its the client who wanted to achieve the particular objective,” he warned.

Miranda Brownlee

Miranda Brownlee

 

Miranda Brownlee is the deputy editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.

Since joining the team in 2014, Miranda has been responsible for breaking some of the biggest superannuation stories in Australia, and has reported extensively on technical strategy and legislative updates. Miranda has also directed SMSF Adviser's print publication for several years. 

Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.

You can email Miranda on: This email address is being protected from spambots. You need JavaScript enabled to view it.

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