Stringent sole purpose test for SMSF reserves

A lawyer has warned SMSFs using reserves that do not adhere to the sole purpose test to the letter may fall foul of the rules and fail the test as indicated by a recent court case.

Referring to the ATO’s recent SMSF Regulator’s Bulletin, “The use of reserves by self-managed superannuation funds”, DBA Lawyers special counsel Bryce Figot pointed to one of the tax office’s concerns in SMSFs using reserves, which was whether the use of reserves or an account by an SMSF trustee complies with the sole purpose test in section 62 of the Superannuation Industry (Supervision) (SIS) Act 1993.

This section stipulates an SMSF fund exists for the purpose of funding a member’s retirement from their business, trade or profession or the provision of benefits for each member after their attainment of an age not less than that specified in the regulations.

“If you have a fund that starts building up very large reserves which don’t belong to a member, which certainly objectively it’s not looking like it’s going to be to pay a retirement benefit, and when the member dies it stays in the fund, so it’s probably looking like it’s going to pay a death benefit,” Figot told a recent DBA Lawyers SMSF Reserves webinar.

“How does that fit into the sole purpose test?”

He cited the recent Federal Court case of Aussiegolfa Pty Ltd (trustee) v Commissioner of Taxation[2017] FCA 1525, which has cast doubt on the application of the sole purpose test in practice. The case suggests if a purpose not stated in the sole purpose test were to exist and was stated in evidence such as emails, this would likely lead the trustee to fail the sole purpose test.

In this case it was found an SMSF property investment in a sub-fund where the tenant of that property was a related party was done so to provide accommodation for the related party and not for the purpose of providing benefits for the SMSF member in retirement.

“Aussiegolfa suggests that if the trustee subjectively expresses a purpose that is not one of the purposes set out in section 62, if it expresses a purpose other than to pay benefits after attaining age 55, it suggests the fund will fail the sole purpose test, which is a very scary situation,” Figot said.

He also mentioned another concern not mentioned in the ATO bulletin in relation to whether a fund has complied with regulation 5.03 of the SIS regulations.

The regulation states the trustee of a regulated super fund or an approved deposit fund must determine the investment return to be credited or debited to a member’s benefit in a fair and reasonable manner between all members of the fund and the various kinds of benefits of each fund member.

“I dare say that funds maintaining reserves might not always comply with that,” Figot said.

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