SMSF trustees and their advisers need to be certain any fund activity is directed to the sole purpose of creating retirement benefits for the fund members, with around 60 per cent of breaches recorded by the ATO related in part, or fully, to the sole purpose test (SPT), according to a technical expert.
Colonial First State head of technical services Craig Day said despite the most recent SMSF statistics from the ATO indicating breaches of the SPT represented 9 per cent of contraventions and ranked fifth in the list of contraventions reported in the 2017/18 data, the figure was much higher as other contraventions often related to the sole purpose of the fund.
“When you look at those other types of breaches, such as those at the top – loans and the provision of financial assistance to members and relatives – we could say that is also potentially a sole purpose issue. If I’m providing financial assistance to a member or a relative, that would also bring into play the sole purpose of the fund,” Day said during his presentation today at the virtual SMSF Association National Conference 2021.
“In-house assets is the second most common breach at 19 per cent and in many cases an investment into an in-house asset is under quite complicated rules, but there might be sole purpose issues there.”
He said borrowing rules, which ranked sixth in contraventions, and arm’s-length transactions, which ranked seventh, both at 8 per cent of total contraventions, also brought into play sole purpose considerations.
“The reason for this is because if I’m transacting with another party, I’m going to do so on arm’s-length terms or terms no more favourable to the other party,” he said.
“Now if I’m entering into a transaction as a trustee that does provide more favorable terms to the other party, I’ll breach arm’s-length rules, but I’ve also potentially breached the SPT.
“If you add up all those things together, you get to some something like 65 per cent of breaches could somehow relate to sole purpose.”
He said these figures meant the SPT was a fundamental issue for SMSF trustees and members to understand, particularly where they may be tempted to access funds.
“For self-managed funds they have got physical assets and it’s a temptation to use them, and there are also large pots of money sitting there where trustees, if they find themselves getting into financial difficulty, see those pots of money and they’re very tempted by them because it does tend to get them out of the frying pan, but unfortunately [they] may end up going straight into the fire.”
