If you have a Self-Managed Super Fund (SMSF), you’ve likely heard of the Sole Purpose Test—a critical rule that dictates how your fund must operate. But what does it actually mean, and how can you ensure you don’t breach it?
What is the Sole Purpose Test?
The Sole Purpose Test ensures that your SMSF exists exclusively to provide retirement benefits to its members, or death benefits to their dependants. Unlike other financial structures, an SMSF cannot be used for personal gain before retirement—not even indirectly.
This is not a “main” or “predominant” purpose test; it’s stricter. Your fund must not provide current-day benefits to you or anyone related to you.
Core vs. Ancillary Purposes
The core purposes of an SMSF include:
- Providing benefits to a member upon retirement
- Paying out benefits when a member reaches 65 (even if still working)
- Paying a death benefit to dependants or an estate
An SMSF can also have ancillary purposes, which may include:
- Benefits after employment termination
- Payments due to ill-health (physical or mental)
- Specific benefits approved by the Australian Prudential Regulation Authority (APRA)
What Could Breach the Sole Purpose Test?
The Australian Taxation Office (ATO) is clear on what can lead to a breach. If trustees prioritise personal gain over retirement benefits, the fund may fail the test. Red flags include:
- Personal Benefits – If an investment provides any present-day benefit to a trustee or related party (e.g., discounts, perks, or personal use of fund assets).
- Influenced Decision-Making – If a trustee chooses one investment over another because it benefits them personally outside the SMSF.
- Financial Detriment – If the SMSF provides a benefit at a cost to the fund (e.g., buying an asset that generates lower returns just to get personal perks).
Investing in Collectables & Property: The Extra Rules
Many SMSF investors like the idea of holding assets such as art, classic cars, or even holiday properties. While this is possible, the ATO applies extra conditions, including:
- No leasing to related parties
- No storage at a private residence
- Mandatory insurance within seven days of acquisition
- Any sale to a related party must have an independent valuation
Failure to comply can invalidate your SMSF’s compliance and result in heavy penalties.
The Risks of Running a Business in an SMSF
Another common question is: Can an SMSF run a business? While not explicitly prohibited, the fund must not breach the Sole Purpose Test. The ATO scrutinises cases where:
- A family member is employed by the SMSF
- The business links to personal hobbies (e.g., a trustee runs a car collection business and the SMSF owns the cars)
- There’s a financial connection to other related trading entities
If there’s any private benefit, the fund could fail the test and lose its tax concessions.
Final Thoughts: Stay Compliant, Stay Secure
A non-compliant SMSF can lose its tax benefits, face legal penalties, and even be forced to wind up. To keep your super fund compliant:
- Ensure all investments align with retirement-only benefits
- Avoid any personal or financial perks from SMSF assets
- Seek professional advice if you’re unsure about investment decisions
If you want expert guidance on structuring your SMSF the right way, get in touch today.