There are many types of superannuation or retirement savings available today. Self-managed super funds or SMSF is one of most regulated types of superannuation. While it gives the trustee the freedom to make the choices that are most suitable to them, it is also highly regulated in terms of administration, taxation, reporting and auditing.
There are a lot of laws and regulations implemented by the government to make sure that it is properly managed by the trustees involved. The sole purpose test for superannuation is one of the ways the government to make sure that money from your superfund is spent according to the guidelines specified by the government regulator.
So that a self-managed super fund can become a complying superannuation fund, it must first be regulated. Therefore, it must pass and follow the operational standard of SIS (Superannuation Industry Supervision) Act of 1993. A complying SMSF pays a tax with a concessional rate of 15 percent, while the non-complying fund will pay a tax of 46.5 percent from its income.
For an SMSF trustee to pass the sole purpose test, they must maintain one core purpose and one or more ancillary purpose.
The core purpose may be one of the following:
• To pay the benefits of the members after fulfilling the working contract.
• To pay the members their benefits once they have reached 65 years of age (the prescribed age)
• To pay the benefits to the immediate family of the member in the case that they die unexpectedly.
The ancillary purpose may be one or more of the following:
(This is for the members to have an access to the benefits if one or more of these situations)
• When a member is terminated from his/her employment given that the employer has contributed to the superannuation of the member.
• When a member stops working due to physical, psychological, or mental illness.
• When a member dies after retirement, the benefits are given to the dependents and/or immediate family.
• During a member’s bankruptcy or when experiencing a terminal illness (as long as the purpose is approved by the Australian Prudential Regulation Authority)
Once the trustee does not follow these regulations, they will suffer consequence such as:
• Making the fund into a non-complying fund, losing its tax concessions
• Disqualification as a trustee
• Prosecution in the court
• Penalty fines
Since you are managing your SMSF personally, it means that you are responsible for any mistakes or non-compliance. Government regulators cannot give you specific advice on what actions to take,, so it is prudent to contact a professional to raise your concern.
Please note that all numbers in this article were accurate at the time of writing but may have changed in the meantime and should be verified independently.