Keep your eye on the prize

SMSF sole purpose test

Personal investment philosophies cannot be put in front of an SMSF trustee's obligation to ensure their fund is meeting the sole purpose test of providing retirement benefits for fund members.

There is one fundamental premise for anyone who decides to run their own SMSF and that is to satisfy the sole purpose test as defined by section 62 of the Superannuation Industry (Supervision) (SIS) Act.

In short, this section basically requires the activities of a superannuation fund, be it an SMSF or otherwise, must be for the sole purpose of providing benefits for its members in their retirement years.

Sounds pretty basic, right? But due to the flexibility of SMSFs, it’s been a slightly contentious obligation throughout the years. For example, trustees are allowed to hold personal-use assets, often referred to as collectables, in an SMSF, but this action has always raised suspicion as to whether portfolio allocations such as these satisfy the sole purpose test.

The question being is the individual actually investing in an appreciating asset when they purchase something like wine through their super fund or are they just adding to their personal cellar via a tax-effective structure.

Of course, the cynical speculation can be fended off with proof the value of the wine collection is increasing over time.

The lesson here is you can invest in almost anything you want to as long as you adhere to some strict guidelines for issues such as storage and insurance, but you must never lose sight of why you are making the investment in the first place.

And it actually is a point that appears to need reinforcing, particularly among the younger SMSF trustee cohort, in light of an irrefutable trend in the investor world – the ever-increasing sentiment to favour environmental, social and governance or ESG investing.

You see, Investment Trends research conducted this year into SMSFs and their investments revealed 9 per cent of participants admitted responsible investing is their top priority. The research house also said this response was mainly among younger trustees.

This a bit of a worry on two fronts. The first is that providing retirement benefits for fund members, by law, needs to be their top priority. Just as you can’t invest in wine or art or those items in super to predominantly satisfy a personal desire to do so, you can’t use an SMSF to purely follow a personal investing mantra by itself.

The second concern is that younger Australians are continuing to account for a greater number of fund establishments. This begs the question whether this 9 per cent of trustees who say responsible investing is their top priority grows in the coming years.

And trustees shouldn’t be lulled into thinking the ATO won’t be casting a closer eye on the sole purpose test in the immediate future. If not for this potential trend, then certainly for other developments in the industry, such as the requirement for trustees to act in the best financial interests of fund members under the Your Future, Your Super legislation, where adherence to section 62 of the SIS Act can be one way for trustees to prove they are satisfying this obligation.

The whole situation potentially serves as a good reminder that no one involved in this sector wants its integrity compromised and trustees always need to be conscious an SMSF has to be run with serious consideration and cannot be treated as just a personal hobbyhorse.


Our Story

selfmanagedsuper is the definitive publication covering Australia’s SMSF sector. It uniquely offers online content tailored separately for SMSF professionals and individual trustees participating in the fastest growing and largest sector of the superannuation industry. As such, it is a must read for those wanting to stay informed about the latest news, regulatory developments, technical strategies, investments, compliance, legal and administration issues concerning SMSFs.

Copyright © SMS Trustee News 2024

ABN 43 564 725 109

Benchmark Media

Site design Red Cloud Digital