Compliance, Contributions

More than one sole purpose test

Sole purpose test Contributions Concessional contributions Superannuation Industry (Supervision) (SIS) Act

The separated sole purpose test covering contributions must be considered when contemplating certain SMSF strategies aimed at providing a tax benefit.

A specialist superannuation lawyer has reminded practitioners and trustees there is a sole purpose test for contributions that must be taken into account when considering any SMSF contribution and withdrawal strategies undertaken to gain a tax advantage.

In particular, Peter Bobbin Lawyers principal Peter Bobbin warned advisers of situations where an SMSF member over the age of 65 makes a concessional contribution to the fund, claims the tax deduction for it and then immediately withdraws that same amount.

“There’s not only a sole purpose test, [contained in] section 62 [of the Superannuation Industry (Supervision) (SIS) Act], there is actually a sole purpose contributions test,” Bobbin told attendees during a presentation at the Institute of Public Accountants National Congress 2023 hosted in Sydney last week.

“And the sole purpose contributions test actually is narrower than the sole purpose SIS Act test. So in the circumstances [where] I put the money [into the SMSF] and claim the deduction on Monday and take it out on Tuesday, [I would] fail the sole purpose contributions test and therefore the contribution is not deductible.”

He pointed out the action is more serious than just a contravention of the superannuation rules as it would be considered to be a case of tax fraud.

However, he acknowledged if there is a significant period of time between the contribution and withdrawal, and the strategy is not expressly communicated to be a tax minimisation move, then it may not be classified as a breach of the sole purpose contributions test.

He also took the opportunity to warn practitioners of their responsibility in these situations.

“If you’re promoting [the transactions to people as a tax strategy, then] you’re a tax promoter and you can be taken down for it,” he noted.

“[However], if you’re just facilitating the strategy [at the behest of the client], then you won’t be considered a promoter.”

The existence of the sole purpose test relating to contributions was established by two Federal Court decisions handed down by Justices Pincus and Hill in 1992, he said.

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