The sole purpose test in the SMSF rules, set out in Section 62 of the Superannuation Industry (Supervision) Act 1993, requires your self-managed super fund to be maintained for one reason only: providing retirement benefits to members, or death benefits if a member dies first.1Australian Taxation Office. Running a Self-Managed Super Fund (SMSF) – Sole Purpose Test Every investment the fund holds and every transaction it enters into has to serve that purpose. If a member, or someone related to a member, gets a financial or lifestyle benefit from a fund asset before they legitimately retire, the fund is almost certainly in breach, and the tax consequences can wipe out decades of savings.
What the Fund Is Allowed to Exist For
Section 62 lists a small number of purposes that justify an SMSF existing at all. At least one of these “core” purposes must always be present:
- Providing benefits to a member on retirement from any occupation, whether that retirement happens before or after they joined the fund.
- Providing benefits once a member turns 65, whether or not they have actually retired.
- Providing benefits to a member’s dependants or legal personal representative if the member dies before retiring or reaching 65.
The age-65 threshold in Section 62 is not the same thing as your preservation age. Preservation age (55 to 60, depending on your date of birth) is when you can first access super after retiring; 65 is when you can access it with no restrictions at all.2Australian Taxation Office. Conditions of Release For anyone born after 30 June 1964, preservation age is 60.
Alongside a core purpose, the fund can also be maintained for certain ancillary purposes: paying benefits when a member leaves an employer that had contributed to the fund, paying benefits when ill-health forces a member to stop working, paying reversionary benefits after a member dies post-retirement, and any other benefit the regulator approves in writing.3Australian Taxation Office. SMSFR 2008/2 – Self Managed Superannuation Funds: The Application of the Sole Purpose Test in Section 62 The ancillary purposes always sit on top of a core purpose. They never replace it, and a fund cannot exist solely for them.
The Rule That Actually Trips Trustees Up
The real bite of the sole purpose test comes from the ATO’s prohibition on what it calls “current-day benefits.” If a member or a related party gets any financial or lifestyle advantage from a fund asset before they meet a legitimate condition of release, the fund is breaching Section 62.3Australian Taxation Office. SMSFR 2008/2 – Self Managed Superannuation Funds: The Application of the Sole Purpose Test in Section 62 It doesn’t matter that the asset is nominally an investment. What matters is who is getting value out of it today.
The most common failures follow a predictable pattern. A fund buys a holiday unit and a member stays there rent-free or below market. A fund owns a commercial building and leases it to a member’s business at a discount. A fund buys a boat that gets used on weekends, or a classic car that the member drives for pleasure. In each case, the fund’s retirement purpose is being subordinated to present-day enjoyment or below-market use, and each is a straightforward breach.
Property, Collectables, and Related-Party Dealings
Two areas cause most of the sole-purpose problems the ATO sees: real estate held by the fund, and collectables. Both are legal to hold, and both have specific rules that don’t forgive shortcuts.
Business Real Property
An SMSF is allowed to own commercial property used in a member’s business, and it’s allowed to buy that property directly from the member. Business real property means land and buildings used wholly and exclusively in a business, which can include primary production, professional services, and any trade carried on for profit.4AustLII. Superannuation Industry (Supervision) Act 1993 – Section 66 This carve-out matters because it sits outside two rules that would otherwise block the arrangement: the ban on acquiring assets from related parties, and the in-house asset cap.5Australian Taxation Office. What Are the SMSF Investment Restrictions?
The exception is narrower than most trustees think. Residential property doesn’t qualify. A farm with a private dwelling can still meet the definition only if the dwelling sits on no more than two hectares and the main use of the whole property is not domestic. And the price paid and the rent charged both have to be at market value, on arm’s length terms. Buying cheap from a relative or charging below-market rent throws you straight back into the sole purpose test problem the exception was supposed to avoid.
The In-House Asset Cap
Outside the business real property exception, related-party investments and leases are capped. The market value of a fund’s in-house assets (loans to, investments in, or assets leased to related parties) cannot exceed 5% of the fund’s total assets.5Australian Taxation Office. What Are the SMSF Investment Restrictions? If the fund goes over 5% at the end of a financial year, the trustees must prepare a written plan to bring it back into line by the end of the next financial year, and then follow through.
Collectables and Personal-Use Assets
Artwork, jewellery, antiques, vintage wine, rare coins, classic cars and similar items are permitted investments, but Regulation 13.18AA of the SIS Regulations layers extra rules on top of the sole purpose test to stop them becoming lifestyle assets in disguise.6AustLII. Superannuation Industry (Supervision) Regulations 1994 – Reg 13.18AA The core requirements:
- The item cannot be stored at the private residence of any member or related party. Storage in other premises owned by a related party is allowed, provided it is not a home.
- No member or related party may use or display the item. A fund-owned painting cannot hang in a member’s office; a fund-owned car cannot be driven for pleasure.
- The item cannot be leased to a related party.
- It must be insured in the fund’s name within seven days of acquisition. Club memberships are the only exception.
- If the fund later sells the item and a related party ends up with it, the sale must be at a market value set by a qualified independent valuer.
Trustees have to keep written records of their storage decisions for at least ten years. The penalty for breaching these specific rules is 10 penalty units per trustee, currently $3,300 per trustee.7ASIC. Fines and Penalties A collectables breach also tends to bring a sole purpose test finding with it, which is where the serious consequences start.
How the ATO and Courts Judge It
The sole purpose test is applied objectively. The question is not what you intended when you made a decision; it is what the pattern of your decisions actually shows about how the fund is being maintained.8Australian Taxation Office. SMSF Investment Requirements Writing “retirement investment” on every board paper does not save a trustee whose fund is consistently channelling money into arrangements that benefit their business or lifestyle today.
The Full Federal Court’s 2018 decision in Aussiegolfa Pty Ltd v Commissioner of Taxation refined this in two useful ways. First, the Court held that a related-party transaction does not automatically breach the test. If the fund leases property to a relative at genuine market value and the property is otherwise a sound investment, the identity of the tenant on its own will not create a breach. Second, the Court read “benefit” as being about financial benefits that prevent the fund from fulfilling its retirement purpose, not every incidental advantage that might flow from an investment. A tiny, unintended benefit arising naturally from a legitimate investment strategy will not automatically fail the test. The gap between incidental and engineered is narrower than trustees usually assume.
In practice the ATO looks at whether rent is at market rates, whether the fund has a documented investment strategy that its actual investments follow, and whether related-party dealings are on arm’s length terms.
What Happens If You Fail the Test
Section 62(1) is a civil penalty provision, and the ATO has a graduated response. For less serious breaches it can issue an education direction or a rectification direction requiring the trustee to fix the problem within a set time. It can impose administrative penalties of between 5 and 60 penalty units per contravention, currently $1,650 to $19,800, and those fines must be paid personally by the trustee, not from the fund. It can disqualify a person from acting as a trustee at all. In serious cases involving dishonesty, criminal charges are also possible.
The most damaging outcome is a notice of non-compliance issued to the fund itself. A non-complying fund’s assessable income in the year of non-compliance includes an amount equal to the market value of the fund’s total assets, taxed at 45%.9Australian Taxation Office. Our SMSF Non-Compliance Actions On a fund with $800,000 in assets that produces a tax bill around $360,000 in a single year.10Australian Taxation Office. How SMSFs Are Taxed The fund also loses the ability to accept rollovers and employer contributions. If a trustee’s conduct could seriously harm beneficiaries, the ATO can freeze the fund’s assets entirely.
Fixing a Breach Before the ATO Finds It
If you discover a breach yourself, the ATO’s voluntary disclosure service gives you a way to bring it forward. Trustees who use the service have to prepare a rectification plan, complete the SMSF regulatory contravention disclosure form with supporting documentation, lodge any outstanding annual returns, and engage with the ATO through the process. The ATO takes voluntary disclosure into account when deciding on enforcement, and it will not start an audit based on an auditor’s contravention report if the same issue is already being resolved through a voluntary disclosure.11Australian Taxation Office. SMSF Voluntary Disclosure Service The ATO expects to see evidence that you have put measures in place to stop the same breach happening again, so a disclosure without a genuine fix rarely lands well.