Sole Purpose Test

The Sole Purpose Test is designed to ensure that each investment made or action undertaken by the SMSF is for the sole purpose of providing retirement benefits or death benefits to the Beneficiaries of the SMSF.

It is important that the sole purpose test is adhered to at all times. If Trustees use the SMSF for any other purpose, e.g. to access funds before retirement or run a business in the SMSF, the Fund may forfeit its compliance status. This means the Fund will no longer be taxed at the concessional rate of 15% but at a much higher rate, with added penalties. So stay within the Superannuation rules!

In its capacity as regulator of SMSFs, the ATO does not take a big stick approach to applying these rules and regulations. As long as the Trustees have a genuine interest in the retirement benefit of the Fund at heart, there won’t be any penalties.

Trustees must maintain an SMSF in a manner that complies at all times with the sole purpose test. This is the most important rule of Superannuation.

APRA Guidance on the Sole Purpose Test

 

Watch the ATO’s Animated Info Guide:

SMSF as the legal owner

It is good practice for Trustees to ensure all investments are under the name of the SMSF and any expenses in the operation of the Fund are supported by an invoice or receipt addressed to the Super Fund.  This will add audit evidence the expense is incurred for the sole purpose of providing retirement benefits. Paying expenses from the SMSF bank account will also make the accounting and auditing process of the Fund easier when preparing the annual tax return for the SMSF. For more information on the naming convention of assets in an SMSF, please click on the button below:

For more information on the process we follow to complete the annual return and what information we expect from Trustees, please click on the button below:

 

 

  • Scott

    Hi Guys,

    I’m interested in obtaining a subscription to an investment research group (e.g. Morningstar) to aid me with investment decisions for my SMSF. Would this be tax deductable for my SMSF as ‘advisory service’?

    Rgds
    Scott

    • superannuationwarehouse

      Scott,

      On the basis this expense is for the sole purpose of the SMSF, the SMSF can pay for this. Its also a good practice to have the invoice made out to the SMSF, as this clearly shows this is an expense for the Fund. This will then be a full tax expense in the Fund.

      Thanks

  • Ranjith

    Could I use SMSF ABN to get an ADSL broadband connection.
    It costs $100 per month for Internet and Phone Line.
    250GB and unlimited Local/National Calls.
    I am using internet for SMSF Online trading, Banking, emailing etc.
    New ADSL account will be in SMSF name.
    Is this something I can claim under SMSF?

    Thanks
    Ranjith

    • superannuationwarehouse

      Ranjith,

      Each expense of the SMSF must be for the sole purpose of the SMSF. As soon as there’s a portion of the expense not for the sole purpose of the SMSF, none of the expense can be claimed in the Fund.
      With internet or computer expenses, if you use it for one personal email, none of the expense can be claimed in the Fund.
      On the basis above, its unlikely these type of expenses can be claimed in an SMSF.
      Trust this makes sense.

      • Ranjith

        Thanks Hein.
        I thought it would be the case after reading the criteria for SOLE PURPOSE TEST.

  • http://www.celcat.com.au Clive O’Sullivan

    Hi

    I have a question:

    Can you advise if our SMSF can purchase a laptop and then lease it back to our company and make a profit?

    • superannuationwarehouse

      Clive,

      If your SMSF purchase an asset and lease it to you, there is the perception of a current-day benefit you receive from your Super. This would be a breach of the sole purpose test.

      The same principle goes that an SMSF can not purchase a house and a family member live in it. But it can be rented out on the open market.

      The SMSF rules are restrictive, designed to protect your super. Best to stick to these conservative rules.

      • http://www.celcat.com.au Clive O’Sullivan

        Thank you . The lease back is not to me personally but to our company. Many people in the company may use the equipment.

        • superannuationwarehouse

          If you have a controlling interest in the company(you and related parties), this investment would not be allowed.
          If you do not control the company, this would be allowed.
          Trust this makes sense.

  • Lochlan Bailey

    Hi,

    If the SMSF owns the residential investment property (title/asset) and the trustees (couple) owns the debt/mortgage in their personal names, could the trustees refinance their SMSF home loan and change the borrower from an individual to SMSF?

    It would be a dollar for dollar refinance with no cash out, no cash will be paid to the trustees but would be paid to the bank who currently holds the mortgage, it would simply be restructuring the mortgage so that the debt is no longer in their personal names.

    Is this possible without breaching any SMSF rules and regulations?

    • Hein Preller

      Lochlan,

      Something does not quite tie up in this scenario as it doesn’t make sense you have a liability for an asset you don’t own. Usually, if the SMSF owns the asset, it will own the debt as well.

      An SMSF can’t ordinarily have any debt. Section 67 of the SIS act allows for an exception to allow for borrowings when an SMSF acquire a single asset. As the intended loan is not to acquire an asset, you can most likely not exercise this section of the act.

      Sorry to be the bearer of bad news.

      • Lochlan Bailey

        Just to clarify the scenario, the property is owned by the SMSF, clear title, trustee’s hold the certificate of title, no finance held against the property. The finance was placed against another property when the SMSF Property was purchased back in 2011. The Trustee’s are the bank to the SMSF for the home loan so the home loan is in their individual names. The Trustee’s have a legal document confirming they are the lender to the SMSF. The Trustee’s want to refinance their home loan out of their individual name and setup a Bare Trust so that a bank can lend to the Bare Trust on behalf of the SMSF and refinance the existing loan. is this possible?

  • Andrew Gillmeister

    If I set up an SMSF fund and purchase a property for AIR BNB with three people and one of the member’s wife runs the day to day business of the Air BNB property such as cleaning and bookings and keys etc and the fund paid that person at a commercial rate is this against the sole purpose rule.

    • https://www.smsfwarehouse.com.au Superannuation Warehouse

      Andrew,

      Generally, an SMSF is not allowed to remunerate Trustees unless the Trustee holds the necessary qualifications and expertise for the services performed.

      We explain more on this topic here, and also refer tot he ATO ruling (at the bottom of the page) setting out some good examples when this is a deductable expense in the SMSF:
      https://www.smsfwarehouse.com.au/expenses-in-a-smsf/

      If this is an allowable expense, ensure the Fund pays on an arms length basis and commercial terms.

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Superannuation Warehouse is an accounting firm and do not provide financial advice. All information provided has been prepared without taking into account any of the Trustees’ objectives, financial situation or needs. Because of that, Trustees are advised to consider their own circumstances before engaging our services.