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Self Managed Super Fund (SMSF) Article
SMSFs must exist for definite purpose

By Tony Negline.

This article may be out of date.

21st April 2004

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One widely acknowledged advantages of using a Self Managed Super Fund is the potential to use the funds assets personally.

Most people who use their SMSF in this way receive a material benefit, such as leasing real property.  A benefit can also be emotional, such as purchasing a favourite artist’s work and displaying it in a room.

When a SMSF provides any benefit to members or their relatives or associates, the trustees must be careful to ensure that the fund complies with a range of regulatory matters.  One of the most important rules that SMSF trustees must continually strive to comply with is the sole purpose test.

The SPT contains two purposes – core purposes and ancillary purposes.

Core purposes can be summarized as follows:

 Ancillary purposes can be summarized as follows:

SMSFs must satisfy at least one core purpose for every member of the fund.  Ancillary purposes are optional however funds can satisfy as many of these as they wish for each member.  A trustee does not have to provide the same types of core or ancillary purposes for (or in respect of) all members of the fund.

This means that a SMSF could have slightly different purposes for each member.  For example it might be possible for one member to be entitled to retirement and death benefits and another member to be entitled to death benefits only.  Where different members have different benefit entitlements this should be carefully noted and will have a flow effect to every aspect of running the fund.

Can a SMSF be operated in such a way that one member receives a “core purpose” benefit and another member only receives an “ancillary purpose” benefit?  No.  Each member of the fund must “receive” at least one core purpose from the fund.

According to Australian Prudential Regulation Authority in its circular III.A.4, you can see what a super fund is trying to achieve by every aspect of how it is organised.  “Contravention of the sole purpose test may arise where there is no retirement purpose behind an investment.  It is not the type of investment which must be considered … but rather it is the purpose(s) for which the investment is made and maintained that is relevant to the [sole purpose] test.”

Many trustees think they can do whatever they like.  It is not uncommon to find trustees who blatantly ignore all manner of super rules.  One example proves this point.  One SMSF owns a house which is its only asset.  For many years the fund has received no rent.  There is no written lease agreement.  The members adamantly deny they live in the house.  Despite this all their personal correspondence is sent to the property and it is also their residence for electoral roll purposes.

A SMSF trustee should not be under the illusion that they can get away with anything because the chance of getting caught by the Australian Taxation Office is small.  (A SMSF has about a 1 in 2,500 - 0.04% - chance of being reviewed at any point in time by the ATO.)  The Tax Commissioner, Michael Carmody, pointed out in a speech last week, the ATO think the sole purpose test is very important and it is on the hunt for funds breaching this and other provisions.

Examples of core purposes:

Please note these examples are for one member of a fund.

1.      Wealth Accumulator

a.       To build sufficient wealth to pay a pension upon retirement equivalent to 60% of pre-retirement earnings, from all sources including salary, wages and fringe benefits

b.      Pay a mix of lump sum and pension benefits to dependants in the event of the death before retirement

c.       Pay a mix of lump sum and pension benefits in the event of the member’s disablement

2.      Pre-retiree who is only going to receive a lump sum from the fund at retirement

To ensure that benefits are maximised

3.      Retired Pensioner
To pay a (allocated, lifetime or term) pension:

a.       for as long as possible (allocated)

b.      life of the member and any reversionary, if relevant (lifetime)

c.       defined term (term)

4.      Child Pensioner

To pay a pension whilst they remain a minor and/or a full-time student under age 25.

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This email is general in nature only and does not constitute or convey specific or professional advice. Legislation changes may occur quickly. Formal advice should be sought before acting in any of the areas discussed. Be aware that the information in these articles may become innaccurate with time. Responsibility is disclaimed for any inaccuracies, errors or omissions. Particular investments are neither invited nor recommended and hence this publication is not "financial product advice" as defined in Section 766B of the above legislation. All expressions of opinion by contributors are published on the basis that they are not to be regarded as expressing the official opinion of any other person or entity unless expressly stated. No responsibility for the accuracy of the opinions or information contained in the contributor's articles is accepted by any other person or entity. Copyright: This publication is copyright. If you wish to reproduce this article you require a license, which can be purchased here, to do so.

 
 
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