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| Superannuation Funds - Sole Purpose Test |
| SOLE PURPOSE TEST |
SOLE PURPOSE TEST:
It was previously mentioned that a complying superannuation fund is basically a regulated superannuation fund that meets the operational standards of SIS. Complying superannuation funds are taxed concessionally (ie. a complying fund is taxed at a rate of 15% while a non-complying superannuation fund is taxed at 47%). The object of the sole purpose test is to ensure that regulated superannuation funds are maintained for the purpose of providing benefits to fund members upon their retirement, or their dependants in the case of a member's death. The trustees of a regulated superannuation fund must comply with the sole purpose test to attract the taxation concessions available to complying superannuation funds.
The sole purpose test is divided into core and ancillary purposes. A regulated fund must be maintained for at least one core purpose OR at least one core purpose and one or more ancillary purposes. It is unacceptable for a fund to be maintained for one or more ancillary purposes only.
A SMSF MUST BE MAINTAINED FOR AT LEAST ONE OF THE FOLLOWING CORE PURPOSES:
1. paying benefits to members on or after retirement from gainful employment; or
2. paying benefits to members when they have reached a prescribed age (currently 65); or
3. paying benefits to members on the member's death. (This may require the benefits being passed on to a member's dependants or legal representative).
BREACH OF SOLE PURPOSE TEST:
One of the main ways to determine if a fund has breached the sole purpose test is to examine the character and purpose of the fund's investments. One example is where the investment arrangement indicates that the purpose of the fund is to provide financial assistance to another party who is not a member or beneficiary of the fund itself.
Another indication of a breach of the sole purpose test occurs when a fund is 'running a business' as part of its investment strategy. The view is that if a superannuation fund is conducting a business, then it is not being administered for the sole purpose of providing benefits for the members and beneficiaries of the fund.
PENALTIES:
Trustees who breach the sole purpose rule face civil and criminal penalties. A breach of the sole purpose test is a most serious breach. It can result in a fine of up to $220,000 and 5 years imprisonment for individual trustees and may result in the fund losing its complying status. Higher penalties apply to corporate Trustees.
Taken from an ATO publication titled 'A DO IT YOURSELF GUIDE FOR TRUSTEES RUNNING A SELF MANAGED SUPERANNUATION FUDN'
15th-May-2001 |
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