Straight to content

State your purpose

Back to front page

Of the innumerable laws governing SMSFs today, one of the most stringently monitored is the Sole Purpose Test. This test is designed to ensure that complying SMSFs are maintained exclusively for the benefit of its members or beneficiaries of members if the member dies before retirement.

The Australian Taxation Office (ATO), regulator of the superannuation sector, warns that when investigating breaches in the Sole Purpose Test, it will look at the SMSF in its entirety rather than isolating certain transactions. The acquisition of in-house or other assets from the fund’s related parties will come under particular scrutiny.

In short, contravention may arise when there is no retirement purpose behind an investment. The SMSF’s practices, rules and procedures, and consistent adherence to them, are the main areas judged under the Sole Purposes Test. Funds failing the test risk losing their complying status.

Given the gravity of not conforming to these laws, it’s important to understand the principles of the Sole Purpose Test, which comprises Core Purposes and Ancillary Purposes.

Core Purposes

These are essentially benefits provided to SMSF members when they meet fund release conditions. For example, the conditions could be met by members on or after retirement, when they turn 65, or if they die before they turn 65.

Core purposes include:

  • Purpose – A fund’s purpose is judged by what the fund is organised for and how it achieves its outcomes. It must not do either of the following:
    • provide benefits for people other than fund members who are retiring, their dependants, or their personal representatives
    • accept contributions that were never intended to produce retirement benefits.
  • Maintenance – The fund must be correctly operated. Maintenance tasks include accepting contributions, record keeping, and adherence to regulatory standards including related party restrictions.
  • Benefits – The fund must provide retirement benefits for its members. It must also protect, support and enhance these benefits through appropriate investments.
  • Payments – Member benefits must be paid in the event of certain conditions of release, such as retirement or death.
  • Members – The SMSF must restrict its benefit provisions to only those who are members of the fund. This includes pensioners and beneficiaries, such as those who have an entitlement to the fund’s benefits due to the death of a member.
  • Individual Members – The rules governing the fund apply equally to each member. No individual member can be in a more advantageous position than another, nor can the fund be maintained for the particular benefit of one or more members.

Ancillary Purposes

These are the provision of other benefits, such as employment termination insurance, salary continuance, reversionary benefits or other benefits that meet fund release conditions.

In order for a SMSF to pass the Sole Purpose Test it must meet at least one of the Core Purposes. Alternatively, it may meet one Core Purpose and one or more Ancillary Purposes.

If a fund is maintained for Ancillary Purposes only, it is a failure of the Sole Purposes Test. Should you have any questions, or you’re unsure about your SMSF, please contact us.

 

Sources:

www.smartcompany.com.au DIY Super Funds Danger in Acquiring Assets From Related Parties 3 Nov 2011

www.apra.gov.au Superannuation Circular No. III.A.4 The Sole Purpose Test

Back to front page