To be eligible for superannuation fund tax concessions, self managed super funds (SMSFs) must be maintained for the sole purpose of providing retirement benefits to members. This is known as the sole purpose test. Failing the test could expose trustees to civil and criminal penalties in addition to the SMSF losing concessional tax treatment.
Previously, it was thought that any benefit provided directly or indirectly to members or related parties of an SMSF from an investment would contravene the sole purpose test. However, a recent Full Federal Court decision will provide some flexibility to trustees on certain investments. The Court decided that an SMSF investment in a fund to acquire a fraction interest in a property to be leased at market rent to the member’s daughter did not breach the sole purpose test.
While the Full Court found the SMSF had not breached the sole purpose test, it ultimately ruled against the trustee, finding that the investment was an in-house asset and breached the 5% limit. Crucially, the ATO warned it may still apply compliance resources to scrutinise whether an SMSF investment in fractional property investments contravenes other legal requirements.