If you have a self-managed super fund (SMSF), then you need to meet the sole purpose test to be eligible for the tax concessions that are normally available to super funds. The sole purpose test aims to ensure that SMSFs are maintained for the purpose of providing benefits to members upon retirement or for beneficiaries if a member dies before retirement.
The sole purpose test is not a formal process that trustees have to go through, but more of a standard rule of thumb they should follow when making decisions relating to their fund and investments. If the sole purpose test is contravened, the fund will lose its concessional tax treatment and be subject to the highest tax rate. Members could also be disqualified as a trustee and face civil and criminal penalties such as fines or imprisonment.
If you or anyone else get some sort of financial, pre-retirement benefit when making investment decisions and arrangements other than increasing the return of your fund, then it is likely that your fund does not meet the sole purpose test. The test is divided into core and ancillary purposes, where regulated funds must be maintained for at least one core purpose and can add one or more ancillary purposes but cannot be run only for ancillary purposes.
The core purposes are paying benefits to:
- Members on or after retirement from gainful employment.
- Members when they have reached a prescribed age.
- Dependents if the member dies.
The ancillary purposes are:
- Termination of a member’s employment where the employee made contributions to the fund on behalf of the member.
- Cessation of employment due to physical or mental health reasons.
- Death of the member after retirement where the benefits are paid to the member’s dependants or legal representative.
- Death of the member after attaining a prescribed age where the benefits are paid to the member’s dependants or legal representative.
- Other ancillary purposes approved in writing by the regulator (ATO or the Australian Prudential Regulation Authority).