Sole purpose test breaches overused

sole purpose test breach

A breach of the sole purpose test is being used too often as the justification for lodging an auditor contravention report.

A specialist superannuation lawyer has suggested a breach of the sole purpose test, as detailed in section 62 of the Superannuation Industry (Supervision) (SIS) Act, is being used too often incorrectly as a practitioner’s justification for lodging an auditor contravention report (ACR).

“Nine-point-nine per cent of total SMSF contraventions reference the sole purpose test. I wonder how many are overstated,” Coleman Greig taxation and superannuation consultant Peter Bobbin told SMSF Auditors Association of Australia Conference delegates in Sydney last week.

“It remains the fifth biggest source of contraventions by type and I’m suggesting that it’s actually expressed maybe too often in certain areas.”

Bobbin pointed out the combination of a few compliance issues does not necessarily mean an SMSF has breached the sole purpose test.

“Just because there is a bunch of other [compliance] failures does not mean that [constitutes] a sole purpose failure. Know that,” he said.

According to Bobbin, instances of a trustee borrowing an amount of money from their SMSF is an example of a situation many practitioners would erroneously categorise as a breach of the sole purpose test rather than a breach of an alternative segment of the SIS Act.

“How many super fund members will tell you when they borrow money that they intended to put it back? Know this, every single one of them that says that is actually affirming there is no section 62 breach there. And yet I see that so often coupled,” he noted.

“Having said that, if they’d borrowed one year and borrowed another year or made a contribution and then immediately borrowed [from the fund], you would be seeing a section 62 and a section 65 breach at the same time.

“It’s the repetitiveness, the continuity, it’s the lack of remorse of doing it that then becomes a section 62 sole purpose test failure and it’s not a failure [of this kind] until then.

“You can have a section 65 breach with no failure of [the] sole purpose [test].”

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