Sole Purpose Test

The tax concessions available to a super fund are crucially dependent on the fund meeting the Sole Purpose Test.

For those with an adventurous approach to their investments, great care should be taken to ensure that the tax benefits of a super fund are not put at risk by unsuitable choices of investment, or by unacceptable dealings with super fund assets.

Subjectively and generally, the sole purpose test can be understood as the requirement that a super fund be set up and managed solely for the officially intended purpose – i.e. to provide retirement benefits for its members. Those purposes can include the provision of death benefits.

“Solely” for retirement purposes strictly prohibits a member having access to, enjoying or making use of a super fund asset at any time before being entitled to by the superannuation access rules.

The Tax Office

In administering access to the super fund concessions, the Tax Office is on the lookout for certain kinds of investment, such as art, wine or a holiday house which might be more prone to usage before retirement which therefore breach the sole purpose test. In this context attention is naturally drawn to high-risk or non-conventional investment forms which potentially may not be objectively be considered capable of meeting a retirement need some time into the future.

The Tax Office have indicated that the most common breaches of the sole purpose test are:

  • investments that offer a pre-retirement benefit to a member or associate
  • providing financial help or a pre-retirement benefit to someone, to the financial detriment of your fund.

In practice

An article by Bryce Fygot from DBA Lawyers argues that although not expressly stipulated by law, a practical way to self-govern investment management within the sole purpose test is to ensure that all transactions are undertaken on a completely objective “arms-length” basis. This eliminates the temptation to incorrectly assume that it is the subjective investment intention of the trustees which matters. The article contains some useful illustrative examples.

The implication is that within that kind of framework, trustees of SMSFs whilst needing to be very careful, need not feel unduly constrained by the type of investment undertaken, as long as it objectively and reasonably can be argued to meet a retirement planning objective.  For some types of investment that will be more clearly determined than for others, and the examples provided in tax ruling SMSFR 2008/2 indicate that the circumstances of an investment and how it is handled very much matter.

Further references for the sole purpose test

 

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This page was last modified on 13 July 2015