An investment that provides an SMSF member with a direct benefit (other than a retirement benefit) is likely to breach superannuation law. The relevant piece of the law is the "sole purpose" test. However, an exception to that test allows an investment even if it gives a member an "incidental advantage".
The ATO has recently issued a ruling which allows SMSF members to receive a limited benefit from a holiday home owned in the SMSF.
Each trustee of an SMSF must ensure that the SMSF is maintained solely for core, or core and ancillary, purposes. This is the Sole Purpose Test. It is found in Subsection 62(1) of the Superannuation Industry (Supervision) Act 1993 (SISA).
A SMSF trustee who maintains a SMSF for any other purpose contravenes the Sole Purpose Test. This means that the:
The Sole Purpose Test is a strict test. It is not a "dominant purpose" or "principal purpose" test. It is a "sole purpose" or exclusive purpose test. The purpose for an investment is determined by an objective judgement on what the SMSF is organised for, and how it achieves that goal. The test is not on the outcome that actually emerges.
Even so, the ATO acknowledges that the sole purpose test is not breached if a member receives an acceptable "incidental advantage".
The Commissioner of Taxation recognises that a properly considered and soundly-based investment (such as the purchase and rental of a holiday property) may provide benefits to members or other related persons:
For an investment that provides incidental advantages to pass the Sole Purpose Test:
Conversely, a benefit is not incidental (and will breach the test) if the trustee makes the investment so as to provide that benefit.
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The ATO's Superannuation Ruling SMSFR 2008/2 (Ruling) provides guidance on the circumstances that the Commissioner views as constituting an acceptable "incidental advantage" and therefore that do not breach the Sole Purpose Test.
Factors that suggest that a benefit is incidental are:
Factors that suggest the Sole Purpose Test is being breached are:
The Ruling summarises the Commissioner's view of situations that may be judged as "acceptable incidental advantages", and as "unacceptable incidental advantages".
The Ruling gives sixteen examples of situations that commonly arise in SMSF investments and discusses what factors the commissioner will apply when deciding on the acceptability of the advantage, such as:
The two examples below are given in the Ruling that concern holiday homes provide an insight into how the Commissioner is likely to apply the rule.
Acceptable maintenance of a beach house: merely an incidental benefit
In line with an SMSF investment strategy, the SMSF trustees invest in a holiday house in North Queensland. The property is managed by agents and available to third parties for short term rental at commercial rates. In the off-peak season when the house is not rented, the SMSF trustees stay in the holiday house to carry out maintenance. The SMSF trustees pay the normal arm's length commercial rates to the agent for the stay.
The Commissioner's view is that this incidental advantage does not breach the Sole Purpose Test because the benefit is:
Unacceptable separately negotiated purchase of holiday house: more than an incidental benefit
The members of an SMSF own a holiday house in a popular tourist destination where they holiday every year. The SMSF trustees invest in a block of holiday apartments at a nearby destination. When investing, the trustees negotiate for the SMSF members to be able to stay in the apartments free of charge — that arrangement is not a standard feature of the sale of the apartments. As soon as the trustees invest in the apartments, the members sell their nearby holiday house.
The Commissioner's view is that this advantage is more than incidental and so breaches the Sole Purpose Test because:
The purpose of an SMSF's investment cannot be for the trustees or members to gain an advantage from the use of any assets — even if the advantage is minor.
However, the Ruling indicates that in limited circumstances, the following may apply to the use of holiday houses and similar trust assets:
Stay on top of the never ending changes affecting superannuation with the following resources from Thomson Reuters: The Essential SMSF Guide and the Australian Superannuation Handbook. Available in book, ebook and online.
If you have any questions in relation to this article, or self-managed superannuation generally, please call Maddocks in Melbourne on (03) 9288 0555 and ask for a member of the Maddocks Commercial Team.
Daniel is a lawyer in the Maddocks Tax & Revenue team.Daniel advises extensively in the following areas:
His advice covers both direct and indirect tax considerations.
Prior to joining Maddocks, Daniel worked at a Big Four Chartered Accounting Firm focusing on tax consulting for mergers and acquisitions.
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