SMSF trustees taking a passive or no action stance on what happens to investments in a related company or trust may breach the sole purpose test in the same ways as if they failed to consider what was best for their fund, a technical expert has claimed.
Colonial First State head of technical services Craig Day said the sole purpose test requires all trustee actions and decisions to be made for the sole purpose of providing retirement benefits to members and failing to take action when required runs counter to that obligation.
“The test looks at core and ancillary benefits and core benefits includes retirement benefits, benefits over the age of 65, as well as death benefits pre-retirement,” Day said during his presentation at the recent virtual SMSF Association National Conference 2021.
“It [the purpose of any fund-related action] has to be solely about providing one of those specified core benefits, and if you’ve got a core benefit, you can also provide an ancillary benefit. Any action that purposely is to provide some sort of other current-day benefit will result in a breach.”
He pointed out these breaches can take place when an SMSF engages in a collateral or parallel benefit alongside a retirement benefit and this would extend to where a trustee chooses not to act as well.
“If I am maintaining the fund used to provide myself a retirement benefit, but I’m also maintaining that fund for the parallel purpose of providing me with some sort of current-day benefit, that actually would be a breach of the sole purpose test,” he noted.
“Keep in mind this could also include a trustee failing to take action, and there are some court cases that show us where a trustee has deliberately not taken action to protect its investments in a related company or trust.
“This has resulted in a breach of sole purpose because what the courts did is they looked at why didn’t the trustee take the action that a normal person would have.
“You have not taken a particular action and why would that be, the court asked, because you’re trying to provide a benefit somewhere else that could be considered a collateral benefit to that particular related party.”
He also noted around 60 per cent of breaches by SMSFs identified by the ATO related in some part to the sole purpose test and Accurium head of education Mark Ellem has warned failing to comply with incoming best financial interest duty obligations could also breach the test.
