Sole purpose test must meet the needs of every member in a fund: technical expert

Cullen said the SPT is an umbrella cover-all test that interacts with all other parts of super legislation and it is important because recent information coming out of the ATO shows that it is the fourth-highest breach, currently sitting at around 10.2 per cent of all breaches.

"That figure sits behind finance loans and financial assistance to members and their relatives, in-house assets and separation of assets and when you think about those other areas which are trending higher in terms of contraventions, more often than not there will be a sole purpose test implication incorporated with that,” he said.

“We've also seen particularly over the last couple of years the ATO is ramping up its activities in relation to the running SMSFs and I think one of the issues around the sole purpose test and some of those other breaches in terms of loans and in-house assets, is there is often a perception amongst a lot of clients that it's their money and they can do what they want with it.”

Cullen said it is important for clients to understand that although they look at their family entity as one group, and every decision they make is for the benefit of the group, they have to isolate the SMSF as a standalone entity and ensure they are acting per super law and the sole purpose test.

He said section 62 of the SIS Act states that a fund must be maintained for one or more core purposes or one or more activity purposes.

“When we talk about core purposes, we're talking about retirement benefits and benefits from the age of 65 which are written into the regulations and the Act to say that is the age you can access your money,” he said.

“There's a differentiation between retirement age from a social security point of view and also death benefits pre-retirement. You'll often hear people say the sole purpose is to provide benefits for your members in their retirement and that is probably the main core purpose.”

There are also ancillary purposes, such as benefits post-employment which in previous years allowed a member to access some of their benefits when they had left a particular employment, but they have become harder to access with preservation rules now in place.

“Some of the other areas of ancillary purposes are invalidity, and if it’s a temporary disability, then accessing income protection. There is also death, post-retirement where a member may not be taking retirement benefits, but the sole purpose will allow them to deal with those death benefits, as well as any other benefits that the regulator makes in writing such as compassionate grounds or financial hardship that may allow you to access benefits.”

When looking at the sole purpose test, Cullen said there is an opportunity and implication that there might be some incidental benefits but where that incidental benefit is the purpose behind the decisions made by the trustees, then it potentially creates a problem.

“There are a couple of tests to apply when talking about some of these incidental benefits, and whether the trustee has sought out or negotiated for that particular benefit,” he said.

“When a trustee arranges for a particular benefit, it's probably going to conflict with the sole purpose of supplying for beneficiaries in their retirement. Also, you have to consider whether that incidental benefit influenced the decision of the trustees and whether the benefit provided was to the financial detriment of the fund.”

He added that trustees need to look at any decision they make to ensure there is a clear purpose in investing for retirement, and whether there is a reasonable direction and clear link and provision to that core or ancillary purpose.