Section 62 of the SIS Act
Your SMSF needs to meet the sole purpose test to be eligible for the tax concessions normally available to super funds. This means your fund 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.
If you or any party directly or indirectly obtain a financial benefit when making investment decisions and arrangements (other than increasing the return to your fund), it's likely your fund will not meet the sole purpose test. When investing in collectables such as art or wine, you need to make sure that SMSF members don't have use of, or access to, the assets of the SMSF. The most common breaches of 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.
The sole purpose test applies to all trustee activities and is bound to any investment activities to ensure that the trustees are acting accordingly. A common example of a breach in the sole purpose test is when it comes to purchasing property inside your super fund.
You are able to purchase a residential rental property of business real property inside of your super fund. The objective of the fund is that the property will provide income through rent and capital growth. This in itself is a valid investment. The problem comes if any of the trustees or their related party then use the property of rent the property.
For example if your SMSF purchased a investment property in a holiday destination and once a year the trustees used the property for a week long holiday. Even if they pay the market rate of rent you would still breach the sole purpose test. If friends of family were provided use of the property you would also breach the sole purpose test.
The penalties of such a breach are high at 46.5% of the value of the fund, as such it is important that all trustee beware of the sole purpose test and ensure at no time is there a breach.