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Sole purpose test a trustee obligation

SMSF trustees must take full responsibility for their decisions as breaches to investment standards could lead to problems with the sole purpose test as well as possible non-compliance, an industry expert has warned.

MLC national manager SMSF advice Peter Hogan said although the sole purpose test was a simple concept, trustees needed to understand how their decisions surrounding their SMSF could impact it.

“Breaches of other investment standards, inevitably lead to a breach of the sole purpose test if they’re serious enough and significant enough,” he said.

“The sole purpose test is always there hanging around in the background.

“If you do actually do the wrong thing to such a significant extent that the ATO decided to make you non-compliant, they’ll be making you non-compliant because you failed the sole purpose test, because [it’s] no longer a genuine retirement agreement.”

The choice of investments made by an SMSF trustee needed to reflect a genuine retirement interest, to ensure their fund would pass the sole purpose test and remain complying, Hogan said.

“A large part of whether a fund satisfies its sole purpose test is largely determined by the actions of the trustees,” he said.

“And the way they deal with the assets of the fund, the investment decisions they make and so on.

“An SMSF must be maintained and operated exclusively for a retirement purpose.”

Although trustees are not prohibited from seeking external advice, the responsibility for the fund and the decisions made in regards to it, remain solely theirs, he added.

“Trustees can delegate activity, but they can’t delegate responsibility,” Hogan said.

“There’s no suggestion that they can’t hire expertise.

“But they are ultimately responsible for any decisions which they make.”

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