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Narrowing in on the sole purpose test

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It’s very easy to take a narrow focus towards the way a fund may invest or in assessing the activities of trustees.  When considering the application of the sole purpose test (which is contained within section 62 of the SIS Act), it is deliberately stated in very broad terms to ensure that it encapsulates that a super fund is be maintained solely for at least:

  • one of the legislated core purposes – being the provision of benefits on or after a member’s retirement, reaching age 65 or earlier death; or
  • one of the core purposes and for one or more ancillary purposes – including the provision on the cessation of a member’s employment and other death benefits and approved benefits not specified in the core purposes.

Whilst SMSFR 2008/2 provides clarification on whether or not a SMSF is being maintained for one or more purposes as stated above and how the provision of such benefits does or does not contravene section 62, it is not until you contemplate a number of separate definitional elements that you start to obtain a clear statement of how the sole purpose test laws apply.

Consider the following elements from the wording contained within section 62 to gain a better understanding of how one may determine the application of the sole purpose test:

Purpose

When looking at APRA Circular No. III.A.4 , a fund’s purpose is not determined conclusively by what outcomes actually emerge.  Rather, its purpose is determined by a judgement of what a fund is organised for and how it achieves this, in light of an assessment of the totality of its operation.

The following examples come to mind that would demonstrate a deliberate contravention by fund trustees with the sole purpose test:

  • where benefits are provided for individuals other than retiring members and their dependants.  This could occur where a fund receives contributions for one or more members which were then used for a purpose other than to produce retirement benefits (see decision in the Early Sunshine Pty Ltd case); and
  • providing benefits to be made available to members in circumstances other than those specified in s.62 of the SIS Act.  This could include where a fund has providing accommodation for the member’s children (see decision in Graham Family Super Fund case).

Maintained

When considering how a fund is maintained, it involves a trustee undertaking those tasks which reasonably form part of the fund’s total operations.  For example, this could include accepting contributions, benefit payments, investing in accordance with the fund’s investment strategy, attending to the fund’s administration and compliance obligations, etc.

Importantly,  these obligations must be conducted in a manner that complies with the sole purpose test at all times while the SMSF is in existence.

Provision (of benefits)

The provision of benefits is wider than merely the ultimate delivery of benefits in accordance with the prescribed payment standards (see Part 6 of SIS Regulations).  Provision (of benefits) extends to other activities such as the protection of assets which support benefits (e.g. SISR 4.09A) and the enhancement of benefits through a well constructed investment strategy.   Important factors need to be considered here which would help to conclude where the fund is (or isn’t) being maintained in accordance with section 62.  This includes (but not limited to):

  • whether the trustee negotiated for or sought out a benefit;
  • the benefit has influenced the decision-making of the trustee to favour one course of action over another;
  • the benefit provided by the fund to the member or another party is at a cost or to the financial detriment of the SMSF; or
  • whether there is a pattern of preponderance of events that, when viewed in their entirety, amount to a material benefit being provided that is not outlined within subsection 62(1)

On or after

Subsection 62(1) specifies benefits that are provided to or in respect of an SMSF member on or after the member’s retirement, employment termination or death.

Where there are benefits paid before a member’s retirement, employment termination or death to a member or related party (e.g. a relative of a member or related business) are, or their nature, more likely to raise questions about compliance with the sole purpose test.  These are typically referred to as current day benefits.  In the context of a SMSF this is particularly pertinent due to the dual capacity of trustee and member.  The relevance of the entity deriving the benefit and the timing of the benefit is consistent with the underlying object of the sole purpose test, being to ensure that the retirement income objective of the fund remains unqualified.

Each member

The core and ancillary purposes envisage the provision of benefits for “each member”.  In other words, the retirement benefits and other benefits provided by the fund must be provided in accordance with rules that apply equally to each member.

Members

The terms of the sole purpose test also indicate that a fund must confine its benefit provisions to persons who are members of the fund.  Generally, this will apply to any person who has some beneficial interest in a fund is entitled to be recognised as a member and hence subject to the protection of SIS.  This includes deferred beneficiaries, pensioners, pensioners and contingent beneficiaries – e.g. persons who may become entitled to benefits on the death of the member.

The ATO’s view expressed on buy/sell agreements in ATOID 2015/10 certainly applies here where a clear benefit is being obtained from the arrangement by an external party (business partner) – see article Sole purposes spells trouble for SMSF buy-sell agreements.

When thinking about the sole purpose test and its application it is important to consider the fund’s governing rules, procedures and practices as primary sources for judging whether a fund is being maintained consistently with the sole purpose test.

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