Tax Conditions for Eligibility

Sole Purpose Test: Tax Conditions for Eligibility

Every SMSF has to necessarily meet the sole purpose test to get eligible for tax concessions which are normally available to the super funds. This means that the SMSFs need to maintain for the sole purpose of retirement benefits provided to the members or their dependents if a member dies before retirement.

The sole purpose test contravention is a very serious offense. In addition to SMSF losing its concessional tax treatment, the trustees can also face severe civil and criminal penalties. Your fund does not meet the sole purpose test if the SMSF directly or indirectly obtains any other financial benefit while making investment decisions and adjustments. The SMSF is solely targeted for increasing the return to the fund and not anything else.

While investing in collectibles like art or wine, the trustees should make sure that they don’t have access to the SMSF assets. The fund fails the sole purpose test in case it provides a pre-retirement benefits example, personal fund asset usage as per the SMSF Ruling.

Guidance for Sole Purpose Test

For the self-managed super funds (SMSFs) considering the sole purpose test implications, they need to include fractional property investments as per the recent Full Federal Court decision in Aussiegolfa Pty Ltd (Trustee) v Commissioner of Taxation [2018] FCAFC 122. As mentioned in the decision impact statement, It is the purpose of making and maintaining a fund’s investments that are central to identifying if there is a contravention of the sole purpose test. Considering the collateral purpose is also a very important point while checking for sole purpose test.

This is in the long-standing views of SMSF Ruling 2008/2. As per this ruling statement, it states that the SMSF purpose is maintained and determined by keeping in mind all the facts and circumstances as per the trustee’s behavior. Concerning this, DomaCom Australia Ltd (DomaCom) has also revamped its product requirements to include a ‘Sole Purpose Test Declaration’ targeted for SMSF trustee investors.

While signing this declaration, the trustee (s) agrees to avoid any such behavior concerning sole purpose test breach including avoidance of:

  • entering into an investment pact as per the potential of related-party accommodation
  • DomaCom influence or any relevant property manager to engage as a tenant of the property
  • influencing a related party to become the tenant of the property directly.

There is a sample copy for the declaration of DomaCom’s ASX 31 October media release.

How ATO Approaches for the DomaCom Fund?

ATO does not undertake any compliance activities of sole purpose test breach under section 62 of the Superannuation Industry (Supervision) Act 1993 (SISA) for their investment in the DomaCom Fund. However, this is only applicable if the trustee has signed the ‘Sole Purpose Test Declaration’ along with:

  • Copy of retention declaration
  • Copy of provision to their approved auditor
  • ATO not being made aware of the pieces of evidence indicating that the trustee has acted inconsistently with the declaration terms.

ATO continues to closely examine the trustees’ breach other than the SISA provisions, or via any other transactional behavior.

Summing up, the sole purpose test target purely for benefits of the member retirement. If the trustees have any additional query that the parameters and criteria mentioned beforehand, they need to contact ATO via Request for Specific Advice Form or can also contact your SMSF service provider.

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