These core purposes must be clearly set out in your super fund’s trust deed. The sole purpose test is also a key condition to be met if you choose to have individual trustees, and you want to pay pensions to members.
The sole purpose test effectively means that you can’t gain any financial assistance, or benefit from using and enjoying the fund’s assets, until you satisfy a condition of release. If you breach this strict provision, the super fund may lose it’s compliance status and all the tax concessions available to complying funds. SMSF’s that are deemed non-compliant are liable to pay a 45% tax rate, rather than the 15% tax rate of complying funds.
The sole purpose test can be satisfied if the self managed super fund satisfies at least one core purpose and one or more ancillary purposes; it is not satisfied if the fund only satisfies an ancillary purpose. The fund’s investment strategy must also satisfy the sole purpose test.
Due to the generous tax concessions available to superannuation funds, the sole purpose test has been established to ensure these concessions are not abused. The Australian Taxation Office closely monitors funds to ensure they do not breach this fundamental aspect of superannuation law.
Trustees of a super fund that breaches the sole purpose test could be in breach of both civil and criminal penalty provisions of the SIS Act. The maximum penalty for trustees of a superannuation fund under the act is five years imprisonment as well as significant financial penalties.