A technical specialist has reminded advisers the sole purpose test overrides all considerations when trustees are considering an SMSF investment, regardless of whether it satisfies all other compliance requirements.
Knowledge Shop technical superannuation adviser Jason Hurst noted this approach is particularly relevant for members contemplating investing in an opportunity involving a related party where the in-house asset rules must be taken into account.
Speaking at the SMSF Association Technical Summit 2024 held in Sydney last week, Hurst told delegates: “Sometimes when it comes to in-house assets, people just jump straight ahead and say ‘my client has this ability to invest in a related company and I just want to check the in-house asset rules’.
“[You need to] take a step back so before we even get to that 5 per cent [of the fund’s total assets that in-house assets cannot exceed], don’t forget the sole purpose test [that requires] trustees act diligently with members’ money.”
He highlighted his point with an example where the son of SMSF trustees is running a business requiring a capital injection and has suggested the superannuation fund invests in the venture to fulfil that need.
“[In this situation] if you jumped straight to the 5 per cent [rules], you’d probably say that’s okay, but [you would have to consider] if it was an unrelated person running this business that isn’t doing so well, would the SMSF [still make the investment],” he noted.
According to Hurst, in this situation it would most likely be more prudent if the parents committed money outside of super to support the son’s business.
“Some people, clients and maybe even some practitioners think the 5 per cent [rule] is just a free kick to do whatever you want, but you should be still evaluating these investments based on their own merit rather than the fact that you can do it if you feel like it,” he said.
