The ATO is putting SMSF trustees on notice about the Sole Purpose Test. This test1 requires a trustee to maintain the SMSF solely:
This article comments on the ATO's latest take on the test — which is found in Draft Taxation Ruling SMSFR 2007/D1 (the SMSF Ruling).
In the SMSF Ruling, the ATO states:
A strict standard of compliance is required under the sole purpose test. The test requires exclusivity of purpose, which is a higher standard than the maintenance of the SMSF for a dominant or principal purpose.
Accordingly, the relevant question is whether the fund is being exclusively maintained for the core purposes, or the core purposes and one or more ancillary purposes, as set out in section 62(1). That is, the test is not whether one or more of those purposes is only the dominant or principal purpose of maintaining the fund.
The SMSF Ruling explains that the Sole Purpose Test may still be satisfied even if benefits that are incidental, remote or insignificant have been created by a transaction or decision. Of course, this is only if those benefits are incidental to the fund being maintained with the section 62(1) purposes exclusively in the trustee's mind.
The SMSF Ruling lists some of the ATO's considerations when determining whether a SMSF has complied with the Sole Purpose Test. The considerations are relevant only to the accumulation phase of an SMSF, not in retirement benefit or pension phase.
The following factors will lead the ATO to conclude that a benefit the SMSF delivers means that the SMSF is not being maintained for the required sole purpose:
The following factors will tend to lead the ATO to conclude that a benefit the SMSF delivers means that the SMSF is being maintained for the required sole purpose:
The SMSF Ruling and the factors listed in it are drafted in an abstract fashion. However, they are more useful when considered with the ATO's examples in an Appendix to the SMSF Ruling.
For example, one of the ATO's examples of an impermissible "separately negotiated benefit" is:
The ATO considers that this separately negotiated benefit would breach the Sole Purpose Test.
Even though the examples are useful, trustees and their advisers need to remember the broad and abstract nature of the ATO's considerations when managing their SMSF's.
The ATO proposes that once the SMSF Ruling is issued it will apply to years of income commencing both before and after its date of issue.
The nature of SMSFs makes it easy for the lines to be blurred for trustees in relation to the purpose for which the SMSF is maintained. Trustees should use the factors and examples in the SMSF Ruling to guide their day-to-day maintenance of their SMSFs.
The ATO has invited the public to comment on the SMSF Ruling. The due date for comments is 19 October 2007.
For more information about the SMSF Ruling or superannuation generally, contact Maddocks on 03 9288 0555 and ask for a member of the Maddocks Superannuation Team.
Andrew is a lawyer in the Maddocks Tax & Revenue team.
Andrew provides advice on:
His advice covers both direct and indirect tax considerations.
Prior to joining Maddocks, Andrew was a tax consultant at a Big 4 Chartered Accounting Firm.
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For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of their team.