Sole Purpose Test

Understanding the Sole Purpose Test

One of the key responsibilities of trustees is to understand the sole purpose test. Section 62 of SISA requires all self managed superannuation to be maintained for the sole purpose of providing retirement benefits to its members. In the event the member becomes deceased, then the benefits should be provided to the member’s nominated beneficiaries or dependents. While the sole purpose test needs to be adhered to for prudent investment decisions, the legislation also allows the fund to be established and maintained for other “ancillary” purposes.

The flexibility in the interpretation of the sole purpose test means trustees can maintain the fund for other “ancillary” purposes, but must at all times satisfy one of the core purposes. The most common transactions to bring the interpretation of the sole purpose test into question tend to be “lifestyle investments” – such as holiday houses, jewellery and artworks. Related party transactions also need to be observed and documented by way of minutes to meetings, in the event they draw the scrutiny of regulators. A contravention of the sole purpose test occurs where the fund is maintained for ancillary purposes, in the absence of any identifiable core purposes.

Examples of core purposes that meet the sole purpose test

The sole purpose test is satisfied if one of the following core purposes is met:

Provision of retirement benefits to members of the fund upon attaining age 65;
Where the member becomes deceased before attaining age 65, the retirement benefits will be applied by the nominated legal personal representative for the benefit of the dependants of the member. This is often the surviving spouse or children of the member; &
Provision of benefits for members of the fund where the member retires from their profession, employment or business activities. 

Examples of ancillary purposes that assist the sole purpose test

Ancillary purposes for establishing and maintaining self managed super funds may exist where one or more of the core purposes is also present. Ancillary purposes may include:

The provision of retirement benefits to a member who has ceased work temporarily or permanently due to physical or mental health;
The provision of benefits by the ATO (previously APRA) as authorised in written form;
The provision of benefits for members on or after termination of employment (includes both resignation and redundancy) from an employer who had contributed to the fund;
The provision of retirement benefits to a member’s legal personal representative and / or to dependents of the member, after the member becomes deceased. 

The definition of a “dependent” can include members who are in an interdependency relationship, children of any ages (both financially and non-financially dependent on the member), a spouse and also de factor spouse.The term interdependency is further defined to include:

  • Financially dependent;
  • Reliance on domestic support or personal care;
  • A personal relationship; &
  • Sharing the same residence.

By way of example the following people are deemed to be interdependent on one another:

  • Elderly sisters living together;
  • Siblings living together where one is working and the other is not;
  • Same sex couple sharing the same address;
  • A family member who attends to an elderly grandmother’s needs at home.

There are many transactions within SMSF that exhibit both ancillary and core purposes. However, trustees must exercise greater care and diligence where transactions involve members of the fund or a related party. In particular, “lifestyle assets” such as holiday homes used during periods of high vacancy, jewellery, artworks held under the fund’s name but are displayed at the member’s place of residency, often arouse the suspicion of the regulators. Where this occurs, the in-house assets rule will be questioned. Trustees would be wise to document all investment decisions made by way of minutes to meetings, and observe the relevant threshold of 5% of the fund’s total asset value.

 

 

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