Q&A: Can my SMSF make charity donations and claim a deduction?

Q: During our working lives, we’ve made tax deductible charity donations and claimed the tax deduction against personally generated and other income. Most of our SMSF is now in pension mode, but we still have some in accumulation. Can the SMSF make charity donations in its own name and claim the deduction against any income earned by the fund?

A: Okay, surprisingly, this is a question that I get asked a lot. Really, the answer comes down to what we always go back to, and it’s called the sole purpose test. The sole purpose test applies to the fund, to all the transactions of the fund and all the activities that the trustees carry out. All of those activities need to be maintained or carried out for the sole purpose of providing retirement benefits to the fund members or to their dependents if they pass away before retiring. All things that are done by the fund must satisfy the sole purpose test.

Now, the question which gets raised is, is making a donation, is your SMSF making a donation going to pass that sole purpose test? Is a donation going to be giving retirement benefits to the members, or is it really giving benefits to someone else, and therefore be in breach of the sole purpose test? I would say questions would be raised as to why the fund is doing it, and I would suggest that it’s going to create a sole purpose test issue. If that’s the case, and we are deemed to have failed the sole purpose test, we can lose the tax concessional treatment for our fund. So essentially earnings are taxed at 45% rather than 15% or 0%. It could render the trustees disqualified. They can never be a member of a fund again or act as a trustee. And it can be fines or imprisonment.