The sole purpose test sets the primary and ancillary purposes for which a superannuation fund must be operated, namely to provide benefits to, or in relation to, members after their retirement, on reaching retirement age, or on their death. The test is in section 62 of the Superannuation Industry (Supervision) Act 1993 (SISA).
Breaching the test may:
One of the trustee's key responsibilities is to invest the money paid into the fund. However, trustees must respect the restrictions that apply to these investment — especially when making an investment that may constitute the carrying on of a business.
The ATO has always been concerned that an SMSF carrying on a businesses may be in breach of the sole purpose test. This is because conducting the business — rather than providing retirement benefits — may become the sole purpose of the fund.
This issue was raised at the National Tax Liaison Group Superannuation Sub Committee meetings on both 26 October 2005 and 8 February 2006. The minutes of the earlier meeting state:
The Tax Office indicated that there is nothing in the legislation to prevent it. However, there are potentially a number of issues in carrying on a business that might lead to contraventions of the SIS Act and Regulations (such as the sole purpose test, or the borrowing of money). As each case must be considered on its own merits, the Tax Office cannot give a more definite answer.
The ATO's recent publication Self Managed Superannuation Funds - Roles and Responsibilities of Trustees states:
A possible indication that the sole purpose test has been contravened is where a fund is running a business as part of its investment strategy. If a superannuation fund is conducting a business, it may not be administered for the sole purpose of providing benefits for the members and beneficiaries of the fund.
Another ATO publication DIY Super - It's your money... but not yet! also discusses this issue, but is being reviewed.
The ATO also has concerns that some investment activities by SMSF trustees — such as share trading and making certain 'tax effective' investments — may amount to carrying on a business. If those activities are carrying on a business, then — again — the SMSF may lose its complying status and the trustee may face penalties.
What investment rules must an SMSF trustee comply with?
The ATO's concerns outlined above reflect its regulatory imperatives in ensuring SMSF trustees comply with:
It is important that trustees are aware of, and comply with, the investment rules set out in the SISA.
The key things to remember are:Trustees must:
If you are uncertain about whether an SMSF is complying with these rules, you should seek legal advice as early as possible.
Paul is a Senior Associate in the Maddocks Commercial team with particular expertise in commercial agreements for the supply of goods and/or services, the Personal Property Securities Act 2009, the National Consumer Credit Protection Act 2009 and the National Credit Code and the Australian Consumer Law.
Paul's key areas of practice include:
Before joining Maddocks, Paul was employed for 13 years with the Victorian Department of Justice, principally as a Deputy Registrar in the Victorian Magistrate's Court, but also as a legislation, policy and project officer for the Department.
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