Popular SMSF Questions Answered – SMSF Sole Purpose Test

A self managed super fund, or shortly SMSF, is a superannuation fund with a primary purpose of providing retirement benefits to all its members. Another characteristic of the SMSF is that all the members of the super fund are also trustees. This means that the members have the power to run and to control the super fund. The super fund can have up to four members. This fund operates in a similar way as other retirement or pension funds. The trustees of the fund hold the assets of the SMSF and have complete control over them, including increased flexibility or security over the super. The members as trustees, make various investment decisions, develop investment strategies and invest according to them. The members of the SMSF can invest in almost any investment product, residential and commercial properties, and other assets.

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There is a SMSF sole purpose test which ensures that the superannuation is well maintained for providing only the best benefits to its members. When it comes to the SMSF sole purpose test, many have many questions. Here are few of the most frequently asked questions answered.

What Is The Basis Of The SMSF Sole Purpose Test?

The SMSF sole purpose test (stated in the s 62 of the Superannuation Industry Act from 1993) strictly states that the super needs to be well maintained with a purpose of providing benefits for its members after their retirement. This sole purpose test comes with tax concessions. For example, it is illegal to acquire a financial advantage when making investments before retirement of the members.

What Are The Ancillary And Core Purposes?

The SMSF sole purpose test is detached into ancillary and core purposes. It should be maintained for one core purpose and one or more ancillary purposes. Core purposes are:

  • paying advantages to members after their retirement from a profitable employment
  • paying benefits when members reach a recommended age for retirement
  • paying benefits in the event of death of a member

The main ancillary purposes are the following ones:

  • end of the member employment with an employer who had made contributions to the fund of that member
  • end of employment due to ill health (mental or physical)
  • death of the member after retirement, where the benefits are paid either to member’s dependents or legal representatives
  • death of the member after reaching a recommended age, where the benefits are paid either to the member’s dependents or legal representatives
  • other ancillary purposes approved by the Australian Prudential Regulation Authority.

What Happens If You Breach The SMSF Sole Purpose Test?

If for some reason the sole purpose test is breached, there are number of things that can actually happen. The SMSF may lose its complying status, and because of that it will lose the considerable tax concessions. It is very important to make sure that your SMSF works within the confines of the SMSF sole purpose test rules.

Does Investing In A Business Breach The SMSF Sole Purpose Test?

When most of SMSF assets are used for investing in a business, it is possible that this will breach the SMSF sole purpose test test. The list of possible breaches include:

  • where the member (trustee) employs some family member for the business, or
  • when the business that is carried by the fund has links to trading objects.

If you have any questions regarding your SMSF, always seek professional advice.