The Sole Purpose Test
A recent court decision upheld the Tax Commissioner view and reaffirmed the importance of the Sole Purpose Test for Self-Managed Superannuation Fund (SMSF) Trustees.
Understanding the Sole Purpose test is the single most important responsibility of a Trustee of an SMSF.
What is the Sole Purpose test?
To meet the sole purpose test, your SMSF needs to be maintained for the sole purpose of providing retirement benefits to your members, or to their dependants if a member dies before retirement. Such that your SMSF meets the Sole Purpose Test it will receive concessional tax treatment.
How is it measured?
What if someone genuinely believes that their SMSF investing in a Swiss chalet is a great way to generate funds for retirement benefits? Further, what if that someone also believes that getting their family and friends to stay there is a great way to achieve that goal because family and friends can be trusted to pay rent on time and to take care of the chalet?
That actual purpose inside that person’s head — their subjective purpose — may well be to provide retirement benefits.
However, does a person’s subjective purpose matter?
The short answer is no.
This is the ATO’s view on the matter:
“Determining the purpose for which an SMSF is being maintained requires a survey of all of the events and circumstances relating to the SMSF’s maintenance. This enables an objective assessment of whether the SMSF is being maintained for any purpose other than those specified by legislation.”
Similarly, the AAThase stated when looking at the matter defined it as:
“Whether a fund complies (with the sole purpose test) will depend on the facts of each case and will be assessed by the objective facts, not the subjective views of trustees or, in the case of the corporate trustees, the directors.”
A Case Study:
Aussiegolf Pty Ltd was the trustee of the Benson Family Superannuation Fund. It invested in a managed investment scheme run by DomaCom. In return for its investment, the SMSF received units in a trust. The trust used the monies invested to buy an apartment at Burwood, intended to be leased as student accommodation. The other investors in the trust were relatives of the members of the SMSF.
Three student tenants were found. Two were unconnected but one was the daughter of the members of the SMSF. It was proposed that all three tenants pay the same rent.
The Commissioner decided that:
• the Fund’s investment in the trust was an in-house asset;
• even if the investment was not an in-house asset, then he used his powers to deem the investment to be an in-house asset; and
• the trustee of the Fund breached the Sole Purpose Test in making an investment for the collateral purpose of providing accommodation to the daughter of the members of the Fund rather than the retirement of the members of the SMSF
The Court upheld the Commissioner’s determination that the Fund had breached the in-house asset rules and the Sole Purpose Test.
The case illustrates the Commissioner was prepared to use his powers to deem an asset to be an in-house asset even if it otherwise was not an in-house asset. Ultimately the Court found that the investment was an in-house asset.
The Court also recognised that acquiring an investment with the intention of it being leased to a relative (even on the same terms as other tenants) also breached the Sole Purpose test.
This highlights the importance of carefully considering the investments of an SMSF and the width of the Sole Purpose Test requirement.
At Powers, we understand the importance of your SMSF always meeting the Sole Purpose Test.