Compliance, SMSF, Superannuation

Sole purpose must be starting point

SMSF sole purpose test

SMSFs should never try to retrospectively fit fund transactions under the sole purpose test, but use it as a first point of reference when deciding on fund-related actions.

SMSF trustees must keep the sole purpose test at the forefront of their decision-making and are unable to reframe fund investments and transactions retrospectively to fit the test, an SMSF technical expert has warned.

Heffron head of education and content Lyn Formica said while the sole purpose test applied to all superannuation funds, there was an additional focus on how SMSFs complied with it since the trustees and members were generally the same people, increasing the risk they or related parties may receive a financial benefit that was not a retirement or death benefit.

“Since the trustees are in control of the investments that are made, the transactions that have been undertaken and the trustees are also the members, there’s this risk that the trustees might get a bit confused about what the purpose of this fund is and undertake activities that don’t comply with the sole purpose test,” Formica said during a recent presentation for the Auditors Institute.

She added that since the sole purpose test applies during the entire existence of a fund, it should be regarded as the first point of reference for any fund-related action.

“We often have a significant focus on the sole purpose test when we’re dealing with the fund’s investments, but it’s really important to recognise that the sole purpose test applies to each and every action and decision undertaken by a trustee,” she said.

“The sole purpose test comes into play when the trustee is accepting contributions and rollovers, acquiring and investing fund assets, administering the fund and using fund assets, such as paying out benefits.

“Every single transaction that a trustee undertakes, they have to have in the back of their mind: is this going to comply with the sole purpose test? Why am I undertaking this transaction? Is it to generate retirement benefits for the members?

“Trustees need to think very carefully about the investments they make and how they explain the reasons for making those investments.

“The sole purpose test shouldn’t be tacked on as an afterthought because a trustee can’t reinvent their motivation for a purchase or a particular transaction after the event.

“They need to be very careful what they put in writing and how they explain their transactions and the reason why they’ve undertaken a particular transaction.”

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