Revisiting the sole purpose test

Christine St Anne  |   19/03/2015 Text size  Decrease  Increase   |  

Christine St Anne: Today, I'm joined by BT Financial Group's Bryan Ashenden to talk to us about the sole purpose test.  Bryan, lovely to see you again.

Bryan Ashenden: You too, Christine.

St Anne: Bryan, with the sole purpose test, it's pretty clear, isn't it, in terms of the definition?

Ashenden: Yeah. Look, the sole purpose test itself is something that applies to all superannuation funds and what it broadly sets out is, the whole purpose for which a superannuation fund needs to exist. And really it comes down to one of two core purposes and you have to abide by one those two. So, one is basically to be able to provide benefits to a member upon their retirement or attaining age 65 or if they were to pass away before that age, to be able to provide death benefits through their dependents.

St Anne: Now the sole purpose test applies to all super funds, large and small, but how is it different with SMSFs?

Ashenden: As we say – so, you are right. It is same test for all superannuation funds. The issue with self-managed super fund really comes back to that complexity that you have because the people who are the trustees, and it's the trustees that sole purpose test applies to, but the trustees are also the members of the fund. So, you are talking about the same person and you might think one thing when you are a trustee, but thinking about something different as a member, but because you are the same person the test always applies and this is what's probably a little bit more complicated. You've got to think about it in the context of am I making the right decision for the fund as opposed to am I making the right decision for me as a member of the fund and that's where that complexity really comes in.

St Anne: In terms of that sort of complexity, Bryan, what are the common breaches?

Ashenden: The major common breach that probably arises are things like, I've got a property inside the fund and I want to go and live in it. So that clearly breaches things like the sole purpose test. It's like you can't do that because you're getting a benefit from the fund today as opposed to is to provide the benefit in retirement or upon death. So that's probably one of those clear examples. It might about the timing of the benefit and where it comes through.

St Anne: What about some of the subtle breaches that can catch trustees?

Ashenden: Yeah. It's really important to be aware of these ones. When you talk about the sole purpose test and we're saying it's for retirement purposes or to pay death benefits, there are a whole range of other little add on or any ancillary benefits they call, which is okay, and that covers things like holding insurance through the fund. But when you look at a sole purpose test, what it does is it applies to every decision that you make and really what was the rationale behind that decision. So it's not just about investments, it's also about when I am deciding to pay out a benefit to a member, all of those sorts of things.

But particularly when you come back to benefits, it will be things like I've decided to invest into particular shares and as a result of investing into those shares I am entitled to discounts on products provided by that company. Now, if you take that and you use that discount as a member because your fund owns those shares, that's actually in breach of the sole purpose test. So, that's sort of things you go, well, I'm entitled to, therefore I can, but that's a benefit again that you get today as opposed to a benefit for retirement.

The other one that has often been talked about in this space is that the fund owns a golf club membership, and that's fine because it might be an exclusive golf club and it becomes quite valuable over time, you just can't go and play golf there using that membership because again it's a benefit today as opposed to a benefit into the future.

St Anne: Well, thank you so much Bryan for your insight, in particular, telling us how to avoid those traps. Thank you.

Ashenden: All right. Thanks Christine.

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