Investments, Regulation

Sole purpose a gatekeeper for assets

sole purpose gatekeeper

The sole purpose test should be seen as a gatekeeper to prevent SMSFs from investing in assets that are likely to be unsuitable for the fund and its members’ end goals.

The sole purpose test can be considered as a gatekeeper when considering whether to add unusual investments to an SMSF, with trustees being encouraged to think beyond whether they can, but if they should invest, according to a technical specialist.

BT Financial Group technical consultant Matt Manning said the rules governing superannuation do not specifically disallow investment in any asset class, but certain investments within asset classes were prohibited.

Manning added there were a range of tests that should be applied to ‘exotic’ investments, such as cryptocurrency, wine, artwork and private unit trusts, which introduced various restrictions, but the sole purpose test was the first hurdle any investment needed to pass.

“Number one, is the sole purpose test satisfied? It’s best to always consider this first because it knocks on the head anything the trustees are intending to purchase that isn’t for the members’ benefit in retirement,” he said.

“The simple question is why is the SMSF purchasing that asset and to satisfy the sole purpose test the answer should be to benefit members in retirement either by way of future capital growth and/or income.

“It also means the trustees cannot derive any present-day benefit from the SMSF investments and they’re not purchasing the investment because they want to use it personally or think it’d be good to show off.”

He said where an investment passed the sole purpose test, trustees should also look beyond how they will acquire an asset and consider why they are doing so.

“Where an SMSF wants to make an investment, the best order would be to determine firstly can it do so as permitted under the law? Secondly, are there any additional restrictions? With this in mind, proceed to the ‘should the SMSF invest’ since just because you can, doesn’t mean you should,” he said.

“The other suggestion I would make is if in doubt, ask an SMSF auditor or the ATO for SMSF-specific advice before purchasing any investment because if you get an unfavourable view, you can nip that in the bud.

“After the fact you may have painted yourself into a corner which can’t be undone before a breach has occurred.”

Copyright © SMS Magazine 2024

ABN 43 564 725 109

Benchmark Media

Site design Red Cloud Digital