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What is the ‘Sole Purpose Test’ for SMSFs?

The principle behind the ‘Sole Purpose Test’ is to ensure that all decisions you make for your SMSF should be made for the sole purpose of providing retirement/death benefits for yourself. A key word here is “retirement”.

As such any expense that provides a current benefit to you, not in retirement, for example travel, training course or investment course etc., must not be paid from your super fund bank account.

Some clients say, “Well what if it has a dual purpose?” In situations like this I ask the client to remember that the tax department officers are ordinary people and will use a very common sense approach to things. Further many of them have seen and heard many different stories over the years, so use your common sense.

When they look at the overall circumstances surrounding the transaction, if they believe the facts point to a situation where the transaction appears to have a substantial amount of private interest attached to it then they will not be happy and you will have some questions to answer. This is particularly the case where travel is associated with viewing super fund assets.

Investing via Super is well regulated as such things tend to standardise.

I find most trustees of a SMSF have a fairly good understanding of where they can invest in their Superannuation Fund.

That being the case there is really only a limited number of expense items that you are likely to see in any SMSF as a deduction. This is somewhat different to personal income tax situations where different professions can have very different tax deductions. As such when we see a strange tax deduction item within a SMSF it really stands out.

Example

Recently we had a client with a rather small SMSF account balance who had spent a significant sum on share trading courses and stock market data downloads, yet had not traded shares at all during the year. This does prompt the questions:

  • Does incurring these costs make sense?
  • Will the auditor and/or accountant working on my fund make sense of this expense when they see it? If not, then maybe seek their input before spending the money.

An important point here is to not be afraid to ask your adviser before spending the money. If it becomes an issue after the fact, the compliance cost can be significant.