Tim Miller, head of education and technical for Smarter SMSF, said on a recent webinar for Super Guardian that related-party acquisitions actually represent a very low percentage of compliance breaches in the SMSF sector, but are the subject of many questions and concerns by trustees.
“For me, there is probably no greater link to the related party acquisition rules than the sole purpose test,” Miller said.
“I talk about the sole purpose test nonchalantly in concept as being either that the purpose of super is to satisfy the core purpose, or a core purpose and ancillary purposes which is the provision of retirement benefits. However, the key to the sole purpose test is that it’s ultimately the singular most important test to determine eligibility for our tax concessions, so we must satisfy the sole purpose test at all times.”
Miller said the sole purpose test is not just a test about paying benefits at the time that’s appropriate such as at retirement, turning 65, or the death of a member.
“It is also about the decision-making processes along the way, ensuring that the reason that the fund exists, and the reason it transacts, is that ultimate payment of benefits and maximising those benefits to pay out to the members or their beneficiaries,” he said.
“The objective of all self-managed funds and all superannuation funds is the provision of retirement benefits for individuals, or the provision of benefits when they reach retirement, so you have to make sure that if the objective is to pay a pension, or lump sums, or whatever it is for the for the fund’s purpose that you are investing and undertaking transactions of which the sole purpose is to provide for these benefits.”
He continued that in addition to those elements, the fund also may have to pay ancillary benefits such as termination of employment, ill health, temporary permanent incapacity, as well as death benefits beyond the retirement age of 65.
“This is one of those areas that is repeated often – that the purpose of super is not an estate planning vehicle. However, by its very nature the sole purpose test is, but to what degree? The core purposes dictate that we are planning for the undesirable event of the member passing away before they retire, or before they hit 65 and then that becomes a core purpose, but then post-retirement it’s an ancillary purpose,” he said.
“The objective is to pay benefits when the member retires and ancillary to that is to pay a death benefit to the beneficiaries post to those events occurring. That’s not what you’re setting the fund up for, but it is one of the reasons that it is available and satisfies the sole purpose test.
“That is a fairly broad statement, that the purpose of the fund is to provide for the retirement benefits, but then when we’re transacting, we’re doing so in a way that is not providing us with any other benefits that aren’t in alignment with those core and ancillary purposes.”
