Video transcript – Sole purpose test
So, you're thinking of purchasing property through your self-managed super fund...
Well, you need to consider the sole purpose test.
'What's that?’, you're wondering?
Well, basically, it means you need to run your fund for the sole purpose of providing super benefits for your members when they retire.
The simple rule is anyone related to a self-managed super fund must not use its assets.
This is Bob.
Bob's fund purchased a holiday house so that Bob's family could use it each summer and rent it out the rest of the time. That means they're receiving a benefit from this asset.
Bob’s auditor reports to the ATO that Bob’s fund has breached the sole purpose test.
The ATO can make the fund ‘non-complying’, which means it could lose almost half its assets.
And Bob may be disqualified as a trustee, meaning he can't continue with his self-managed super fund, or start a new one.
Bob may also be fined up to $10,200, which he would have to pay out of his own pocket.
Bob’s retirement plans...well, they aren’t really going to plan.
Bob should have followed Kelly’s example.
Kelly speaks to her adviser before making investment decisions. She learns that her fund can purchase a holiday house, just as long as Kelly and anybody related to the fund do not use it.
Kelly listens to this advice and no contraventions are found by her auditor.
The holiday house provides a steady return over the years, so Kelly’s plan for a comfortable retirement is looking good.
The sole purpose test applies to all investments, including collectable items, such as artwork, jewellery and cars.
So before making any investment decisions, ask yourself: ‘What's the purpose of this investment?’
If the purpose is solely to provide retirement benefits to members – great. But if it's to immediately benefit members or anyone related to the fund - you should skip that investment.
For more information, check out our other videos, or visit the ATO website at ato.gov.au