There's a key question to be asked when looking at the transactions and movements in a self managed super fund, known as the Sole Purpose Test.
The Sole Purpose Test means your fund needs to be maintained for the sole purpose of providing retirement benefits to the members, or to their dependents if a member dies before retirement (SIS Act Section 62).
If any member and/or related party (directly or indirectly) obtain a personal financial benefit when making investment decisions, it’s likely the fund will not meet the sole purpose test.
How serious is this?
Given that the area is being closely monitored by the ATO, we say very serious. Sole Purpose is a cornerstone of super legislation. Breaches can lead to;
- The SMSF being deemed as non-complying
- Penalty taxes which would wipe out nearly half the fund value
- Trustees being removed and disqualified from acting as trustee in future
- Fines of over $10,000 per trustee
There's some common breaches of the sole purpose test. These include using assets personally that fund owns, lending money from the fund to prop up a struggling associated business, and allowing family to use something owned by the fund.
An example is a fund that owns a unit in an apartment building.
The fund trustees allowed their children to live in the unit while at university, which also allowed them to claim study living allowances. Good units were hard to come by in the area, especially to students, and the tenants had decided to move so the timing was right.
The trustee knew they had to be careful, so decided to charge rent of about the same as the tenants had been paying.
So even though something akin to market rent is being paid, the tenants are related parties are occupying a residential property owned by the fund. A big no no.
And this means a problem with the Sole Purpose Test (despite the trustees best intentions).
To avoid a significant issue, the trustees had to have their children move out pronto. Further, the trustees have to recognise there's been a breach and are taking positive steps to rectify it themselves double quick (with the recognition and rectification minuted for future).
If you've got a SMSF and need more information on the Sole Purpose Test or want to make sure you're complying with the rules, make sure you Contact Us.