Transactions between an SMSF and a related party do not automatically create problems for the fund in regards to the sole purpose test, but trustees should look beyond obvious issues to dealings that are more complex or layered to ensure they are compliant with the measure.
Cooper Partners Financial Services director Jemma Sanderson said dealings between an SMSF and a related party were allowed under superannuation law, but problems occurred where complex arrangements meant a member gained a current-day benefit or fell outside the purposes of the test.
“So when are assets being used for a current-day benefit? For instance, where they are being used to assist members and a loan to a member would be a breach of section 66 of the Superannuation Industry (Supervision) Act,” Sanderson said during a presentation yesterday hosted online by The Auditors Institute.
“That breach would go hand in hand with not only a breach of the sole purpose test, but usually a breach of the in-house asset provisions as well.
“Yet it doesn’t have to be as blatant as a loan to a member. It could be via an interposed entity, a trust or because a particular investment of the fund has enabled the member with the related-party transaction to get a current-day tax benefit outside the super fund.
“The other thing is the diversion of income from other related entities into an SMSF, such as the transfer of shares in a listed company.
“A lot of the time that’s done for retirement purposes to make contributions, but depending on the particular asset, it could well be income that is going to be generated at a better tax rate and the capital gain subsequently would be also at a better tax rate.
“If you’ve got a current-day benefit being provided to members of the fund, that would be in breach of the sole purpose test because it’s not for the core purposes or the ancillary purposes of the fund.”
These core purposes are limited to superannuation benefits on the retirement of a member or death benefits after that event, with the ancillary purposes limited to benefits on the cessation of employment, disability or death benefits before retirement.
