One of the most common questions we get asked in relation to Self-Managed Superannuation Funds (SMSF) is what the sole purpose test is and how do I ensure I don’t breach it.
The Superannuation Industry (Supervision) Act 1993 (Act) at section 62 provides that a trustee of an SMSF must ensure it is only maintained for certain core purposes, that is providing retirement benefits to members or their beneficiaries upon death and some ancillary purposes.
The Australian Taxation Office (ATO) administers this Act and is responsible making determination as to when the sole purpose test is breached by an SMSF.
An ancillary purpose would be having to stop work due to ill health.
The most important duty of any trustee is to exercise honesty, care, skill and diligence and not breach the sole purpose test
An SMSF will only receive eligible tax concessions if it meets the sole purpose test, and it is illegal to:
- access funds early
- be paid for your duties or services as a trustee
- invest in a related business
- use the SMSF’s assets for personal use.
By way of example, it would be illegal for an SMSF to buy a rental property and a related party is allowed to rent it.
A member of an SMSF must not use or gain any benefit from any asset until that member meets a condition of release.
A condition of release includes:
- Ceasing work after the age of 60
- Reaching the age of 65 even thought you may still be working
- Reaching your preservation age and beginning a transition-to-retirement pension
- Retiring at your preservation age of 60 for all new and intending retirees
What should be done to avoid breaching the SMSF?
Any trustee must always ask themselves what is the purpose of the proposed investment?
The only answer can and should be to provide retirement benefits to members.
What happens if you fail the sole purpose test?
There are significant consequences if you breach the sole purpose test including:
- A fine or even imprisonment of the trustee/s, dependent on the nature of the breach
- The loss of the SMSFs concessional tax treatment
- The trustees being disqualified from being members of the SMSFs or setting up a new SMSF
How do the courts interpret the sole purpose test?
In the case of Aussiegolfa Pty Ltd v Commissioner of Taxation (2018) the Full Court of the Federal Court confirmed:
- An arrangement that is arm’s length terms should not contravene the sole purpose test.
- The word ‘benefit’ refers to a financial benefit rather than a benefit such as providing accommodation to a relative
- It is an objective test, and the motivation of a controlling director is not to be confused with the purpose of the corporation they control.
This is a simplified version of what the court found, and it must be remembered that a collateral purpose may still be deemed by the ATO as being a breach of the sole purpose test.
How can FC Lawyers Help?
The rules around SMSFs can be complex and a breach of the sole purpose test as outlined above can have significant consequences for any SMSF.
Contact our team to discuss any issues relating to your SMSF and its legal obligations.
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