Compliance, Investments

SPT compliance about motives

Motivation Investments Sole purpose test SMSF

Compliance with the sole purpose test is reliant upon the reasons behind making a particular investment rather than the assets in question.

A technical specialist has reminded advisers and trustees the assessment of whether an SMSF complies with the sole purpose test (SPT) is not dependent upon the asset in question, but about the motivating factors as to why the investment was made by the fund.

“What you apply to one SMSF is not necessarily what you would apply to another. [With regard to SPT compliance] everything is based on the how and why the trustees made the decision. What was the driving force [and] what were they looking to achieve by making the particular decision,” Accurium senior SMSF educator Anthony Cullen told attendees of the latest technical webinar he hosted.

To this end, Cullen noted the exact same investment may be compliant with the SPT for one fund but not another. He used the example of an investment in bank shares to illustrate this point.

“Let’s say you’ve got two funds looking to invest in some bank shares. Fund A had documented that its decision to make that investment is based on projected growth and the dividend yield of [those particular equities],” he said.

“With Fund B, its main driver behind [investing in those same bank shares] was based on the fact there was a shareholder discount that the [SMSF] members would be able to use personally.

“So even though the investment in this company itself might not be a problem … but as soon as Fund B starts telling everybody and has evidence the decision was made because of the benefit the shareholder gets, then we’ve got a problem with the sole purpose test.”

According to Cullen, advisers must be conscious of the evidence their clients have to support their investment decisions and whether they are appropriate from an SPT perspective.

“Is it just an email trail between you and the client? Is that the only evidence you got? [You need to determine if] they have that evidence to support [the fact] they are abiding with the sole purpose test,” he suggested.

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