The sole purpose test for trustees
The single most important rule for your SMSF, explained simply: your fund must exist only to provide retirement benefits.
By Tash ·
If there is one rule every SMSF trustee needs to understand, it is the sole purpose test. It is the foundation everything else is built on, and breaking it is one of the most serious things that can happen to a fund. The good news is that the rule itself is simple to grasp.
What the rule says
Your fund must be maintained for one reason: to provide retirement benefits to its members, or benefits to their dependants if a member dies. That is it. The fund is a vehicle for your retirement, and it cannot be used to give you, or anyone connected to you, a benefit today.
The key idea: no benefit now
The heart of the rule is that you cannot get a present-day benefit from the fund. A present-day benefit means any advantage you enjoy now, rather than in retirement. It does not have to be cash in your pocket. Using or enjoying a fund asset counts.
Here are the kinds of things that break the rule:
Living in, or holidaying in, a property the fund owns. Even staying there occasionally is a problem.
Hanging a painting the fund owns on the wall of your home or office, or wearing jewellery the fund owns.
Storing a classic car the fund owns in your garage and driving it.
Letting a family member use a fund asset for free or on special terms.
Choosing an investment because it helps your own business or lifestyle, rather than because it is a good investment for the fund.
In each case, the problem is the same: someone is getting a benefit now from an asset that is supposed to be locked away for retirement.
Why it is treated so seriously
The whole point of super is that it gets tax concessions because the money is set aside for retirement. If trustees could use fund assets for present-day enjoyment, the concessions would be subsidising their lifestyle, not their retirement. That is why the regulator treats sole purpose breaches as among the most serious, and why a sustained breach can put the fund’s tax concessions at risk.
How it connects to other rules
A sole purpose problem usually breaks other rules at the same time. Letting a relative use a fund property for free is also likely to be financial help to a relative, which is banned, and may breach the limits on dealings with people connected to you. So a single bad arrangement can trigger several breaches at once.
How to stay on the right side of it
Staying compliant is mostly common sense. Before the fund buys or does anything, ask one question: is anyone connected to this fund getting a benefit now, rather than in retirement? If the honest answer is yes, do not do it. Keep fund assets used only as investments, never for personal enjoyment, and keep them physically and financially separate from your personal life.
The bottom line
Your SMSF exists for one purpose: your retirement. You cannot use or enjoy its assets today, and neither can your family. Ask yourself whether any arrangement gives someone a benefit now, and if it does, steer clear. Get this rule right and you avoid the most serious trouble an SMSF can run into.
This article is general information for trustees and members. It is not financial, legal or tax advice about your particular situation. Consider getting advice from a licensed professional before making decisions about your fund.
Common questions
- What is the sole purpose test?
- The sole purpose test means your fund must be maintained for one reason only, to provide retirement benefits to its members, or benefits to their dependants if a member dies. It cannot be used to give anyone a benefit today.
- What counts as a present-day benefit?
- A present-day benefit is any advantage you enjoy now rather than in retirement. It does not have to be cash; using or enjoying a fund asset, such as living in a fund property or driving a fund-owned car, counts.
- Why is the sole purpose test treated so seriously?
- Super receives tax concessions because the money is set aside for retirement. If trustees could use fund assets for present-day enjoyment, the concessions would be subsidising their lifestyle, so a sustained breach can put the fund's tax concessions at risk.
- How do I stay on the right side of the rule?
- Before the fund buys or does anything, ask whether anyone connected to the fund is getting a benefit now rather than in retirement. If the honest answer is yes, do not do it.