The sole purpose test is a test the ATO uses to ensure that SMSF trusts are operating with the intention of only benefitting from their funds through the sole purpose of either retirement or in the event of a member’s death.
While the way that an SMSF manages its investments is not ruled by the ATO, it does have some general rules that must be adhered to – the sole purpose test helps an SMSF comply with this ruling.
The ATO’s Self Managed Superannuation Funds ruling (SMSFR) refers to “the application of the sole purpose test in section 62 of the Superannuation Industry (Supervision) Act 1993 to the provision of benefits other than retirement, employment termination or death benefits”.
Using SMSF funds for any other purpose, where members can be seen to benefit from them prior to retirement, or member’s dependants can be seen to benefit prior to the member’s death, are strictly prohibited.
According to the ATO, the most common reasons that SMSFs breach 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”
There are some very few examples of cases in which this ruling might be put aside – but the circumstances would have to be extraneous and each case is dealt with objectively. For example, when a member has demonstrated a case of ‘hardship’. But generally speaking, the SMSF must meet the objective of one (or more) of the core purposes or one (or more) core purposes and one (or more) of the ancillary purposes. These are as follows:
Sole Purpose Test – Core Purposes
- retirement benefits
- benefits after reaching an age specified in the regulations (such as preservation age)
- death benefits
- for one or more core purposes and one or more of the ancillary purposes
Sole Purpose Test – Ancillary Purposes
- benefits after termination of employment
- benefits after leaving work due to ill-health
- other benefits approved by the regulator
There can be some confusion around the ATO ruling on meeting the sole purpose test, and that is due to the somewhat general nature of the terms. And, this might seem beneficial to any SMSFs that are dealing with a breach, because they are dealt with objectively. However, it is still highly advisable to try to follow the sole purpose test as closely as possible.
Disclaimer: This information should not be considered personal financial advice as it is intended to provide general advice only. This factsheet has been prepared by Superhelp Australia Pty Ltd without taking into account your personal objectives, financial situations or needs.
The information contained in the fact sheet may not be appropriate to your individual needs, therefore, you should seek personal financial advice before making any financial or investment decisions.
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