Q: We all know what the sole purpose test (SPT) is. However, what I need to know is when the sole surviving or even the youngest member of the fund finally turns 65 does the sole purpose test then become redundant? Consequences for example: if the fund owns a rental property – can family members now live in it? But the main query relates to the role of the SPT once the youngest member attains age 65.
A: Thanks for the question, Paul. This is a common query we’re getting and the fact that we’re getting this question a lot suggests there is still some confusion around the sole purpose test. So hopefully I can assist with that confusion. What I’ve given you here are two very separate ATO regulator references for you. And this pretty much sums up the issue.
So, I just want to take you through these two things. The first one is taken directly from the ATO website, which says “Your self-managed super fund (SMSF) needs to meet the sole purpose test to be eligible for the tax concessions normally available to super funds. This means your fund needs to be maintained for the sole purpose of providing retirement benefits to your members or their dependents if a member dies before retirement”.
It doesn’t say, and the legislation doesn’t say, that your fund needs to be maintained for the sole purpose until you start paying pensions. It’s throughout that as well. Otherwise, if you think about this, you could start using tax concessioned assets held in superannuation like a property where, for instance, if you’re in pension phase, all the income is tax free. You could start living in it and not charging rent, giving it benefit to members with your retirement savings. It’s not really what the sole purpose test is for.
The sole purpose test applies whilst your fund is still in existence. And in fact, if we go to an SMSF ruling (these are the ATO specific legal rulings) relevant to, in this case, SMSF. SMSFR 2008/2 sets out that “A trustee must maintain an SMSF in a manner that complies with the sole purpose test at all times while the SMSF is in existence. This extends to all activities undertaken by the SMSF during its life cycle”. So really, to answer your question, the sole purpose test needs to be adhered to throughout the entire life of the fund. You need to ensure that those strict compliance obligations, including the solve purpose test, are adhered to at all times.
Whilst the property is still held inside the fund, if you then lease the asset, putting a residential property to a member or a related party, it will result in that property becoming an in-house asset and being included in the 5% test. So you don’t get out of the in-house assets test. You don’t get out of the sole purpose test, merely because we’ve entered into retirement phase or we’re all in pension phase. It still needs to be met.
The one other point I want to make here is I mentioned that whilst the asset, whilst the property is an asset of the fund, any lease or lease arrangement (what I mean by that is you would usually see a written lease in place that covers the terms of the lease) the super rule suggests that even if there isn’t a lease in place, there’s a lease arrangement in place. So the sole purpose test still needs to be adhered to at all times, while it’s an asset of the fund.
Have a look at the article which was published on the website on What is the sole purpose test and how does it work?