The object of the sole purpose test is to ensure that regulated superannuation funds (SMSFs) are maintained for the purpose of providing benefits to members upon their retirement or their dependants in the case of the member’s death before retirement. The trustee of a regulated superannuation fund must comply with the sole purpose test to be eligible for the taxation concessions available to a complying superannuation fund.
A complying superannuation fund is basically a regulated superannuation fund that meets the operational standards of the Superannuation Industry (Supervision) Act 1993 (SISA). In other words, to be a complying fund the fund has to first be a regulated fund. A complying superannuation fund’s income will be taxed at the concessional rate of 15%, while a non-complying fund’s income will be taxed at 47%.
The sole purpose test is divided into core and ancillary purposes. A regulated fund must be maintained for at least one core purpose OR at least one core purpose and one or more ancillary purposes. It is unacceptable for a fund to be maintained for one or more ancillary purposes only.
An SMSF must be maintained for at least one of the following core purposes:
Ancillary purposes for maintaining a fund are for the provision of benefits to members in the following circumstances:
This last ancillary purpose allows a fund to provide benefits in situations of financial hardship and/or on compassionate grounds.
One of the main ways to determine if a fund has contravened the sole purpose test is to examine the character and purpose of the fund’s investments. For example, investment arrangements can not be for the purpose of providing financial assistance to another party who is not a member or beneficiary of the fund itself.
Another indication of a possible contravention of the sole purpose test is where a fund is ‘running a business’ as part of its investment strategy. Our experience is that where a large proportion of fund assets are used to conduct a business within a self-managed superannuation fund, the fund will almost inevitably contravene the sole purpose test (and/or other SISA provisions). This is because generally the purpose for which the investment is made is not to generate retirement benefits but rather to enable the trustees to operate the business.
An interesting case on contravening the sole purpose test was decided in 1995. It is known as the ‘Swiss Chalet Case’ (Case 43/95, 1995 ATC 374). In this case the fund had purchased shares which enabled access to a golf club for the managing director of the employer-sponsor of the fund. The fund had also invested in a Swiss Chalet which provided a source of income for the managing director and his family trust. Except for the managing director and his wife, the members of the fund were employees of the employer-sponsor. The employees were mainly high turnover, young, casual workers who had never received any benefit from the fund and were not even aware of the fund’s existence. The court decided that the fund had failed the sole purpose test as the money in the fund was not used for the retirement purposes of its members. A contravention of the sole purpose test is very serious and may lead to the trustees facing civil and criminal penalties. It can result in a fine of up to $220 000 and 5 years imprisonment for individual trustees and may result in the fund losing its complying status. Higher penalties apply to corporate trustees.
Information provided by the ATO
Are you looking for a proven, low risk approach to investing directly in the stock market?