There are many benefits to operating a Self managed superannuation fund (SMSF) including investment choice, control over where assets are invested and a number of tax advantages, making these funds an attractive wealth creation vehicle for individuals seeking to maximise their income and lifestyle in retirement.
With an ageing population placing pressure on the Australian economy it is no wonder the Government continues to acknowledge the SMSF sector as playing a critical role in encouraging individuals to take control of their retirement savings. This is evidenced by the ongoing provision of tax concessions and development of rulings and taxpayer alerts aimed at providing greater clarity and confidence to trustees.
Whilst encouraging growth in this sector the Government in its role as the Regulator, continues to review and tighten the rules and regulations that SMSF trustees must adhere to. These obligations exist to ensure that funds’ assets are protected and maintained for the sole purpose of providing retirement benefits to members.
Compliance with the Sole purpose test is arguably the single most important obligation of a SMSF trustee and failure to comply can result in serious civil and criminal penalties and loss of tax concessions.
This paper will commence by providing an explanation of the Sole purpose test in the context of how it applies to an SMSF. It will then draw the reader’s attention to recent cases where Funds have been found by the courts, to have breached the Sole purpose test. The paper will continue to explore the specific activities that caused these breaches.
Saving only for retirement – the Sole purpose test
In order for an SMSF to receive tax concessions it must be a Complying superannuation fund. For an SMSF to be a Complying super fund it must be a Resident regulated superannuation fund at all times during the income year and must have not contravened any of the Regulations or provisions outlined in the Superannuation Industry (Supervision) Act 1993 (SISA). One of the provisions outlined in Section 62 of the SISA is the Sole purpose test. The objective of the Sole purpose test is to ensure that an SMSF is maintained only for the purpose of providing benefits to members upon their retirement, or to their dependants upon the member’s death.
The Sole purpose test stipulates that an SMSF must be maintained for at least one core purpose or at least one core and one or more ancillary purposes.
A core purpose can be one of the following:
* To pay benefits to members on or after retirement from gainful employment, * To pay benefits to members once they have reached a prescribed age, or * To pay benefits to the members dependants on the member’s death.
As long as the trustee has one or more of the core purposes for maintaining the fund, a fund can also be maintained for one of more ancillary purposes. This means that a fund can also be maintained for the provision of benefits to members in the following circumstances:
* When a member leaves an employer who has contributed to the fund, * When a member has to retire from the workforce due to ill-health (physical, psychological or mental), * Death of the member after retirement where the benefits are paid to the members dependants or legal representative, and * When a member become insolvent or when experiencing a terminal illness (as long as this purpose is approved by the regulator).
An SMSF may provide benefits that fall outside the scope of those that are specified above as an incident of activities carried on by it that meet the requirements of the sole purpose test.
What constitutes a breach of the Sole purpose test?
Any trustee that maintains an SMSF for a purpose other than those set out in SISA is in contravention of the Sole purpose test. Should a fund contravene these rules it can be declared non-complying and lose concessional tax treatment as a...