{"id":4685,"date":"2013-11-04T00:00:22","date_gmt":"2013-11-03T13:00:22","guid":{"rendered":"http:\/\/www.dbalawyers.com.au\/?p=4685"},"modified":"2022-03-07T16:16:12","modified_gmt":"2022-03-07T05:16:12","slug":"sole-purpose-test-new-way-answer-old-problem","status":"publish","type":"post","link":"https:\/\/www.dbalawyers.com.au\/smsf-compliance\/sole-purpose-test-new-way-answer-old-problem\/","title":{"rendered":"The sole purpose test \u2014 a new way to answer an old problem"},"content":{"rendered":"

Could I be controversial? If dealings are at arm\u2019s length, the sole purpose test will be met.<\/p>\n

This is not how most people think of or explain the sole purpose test. Indeed, this is not how the ATO in SMSFR 2008\/2<\/a> approach the sole purpose test. Also, it is not how courts or the AAT approach the test.<\/p>\n

Nevertheless, for the busy adviser, I think there is a lot of merit to approaching the sole purpose test this way.<\/p>\n

Here\u2019s why.<\/p>\n

What the sole purpose test says<\/h3>\n

\"SMSFThe sole purpose test provides that super fund trustees must ensure that the fund is maintained for certain purposes. Naturally, such purposes are things like the provision of retirement benefits.<\/p>\n

For full details see s 62 of the Superannuation Industry (Supervision) Act 1993<\/em> (Cth)<\/a>.<\/p>\n

How to work out purpose<\/h3>\n

How should the \u2018purpose\u2019 in the sole purpose test be measured? What if someone genuinely believes that their SMSF investing in a Swiss chalet is a great way to generate funds for retirement benefits? Further, what if that someone also believes that getting their family and friends to stay there is a great way to achieve that goal because family and friends can be trusted to pay rent on time and to take care of the chalet?<\/p>\n

That actual purpose inside that person\u2019s head \u2014 their subjective<\/em> purpose \u2014 may well be to provide retirement benefits.<\/p>\n

However, does a person\u2019s subjective purpose matter?<\/p>\n

The short answer is no. The ATO state in SMSFR 2008\/2<\/a>:<\/p>\n

Determining the purpose for which an SMSF is being maintained requires a survey of all of the events and circumstances relating to the SMSF’s maintenance. This enables an OBJECTIVE<\/strong> assessment of whether the SMSF is being maintained for any purpose other than those specified by subsection 62(1). [Emphasis added]<\/p>\n

Similarly, the AAT have stated in Montgomery Wools<\/em> [2012] AATA 61<\/a>:<\/p>\n

Whether a fund complies [with the sole purpose test] will depend on the facts of each case and will be assessed by the OBJECTIVE<\/strong> facts, not the subjective views of trustees or, in the case of the corporate trustees, the directors. [Emphasis added]<\/p>\n

In short, you work out someone\u2019s purpose by looking at the concrete facts and seeing what those facts suggest their purpose is.<\/p>\n

How to objectively<\/em> work out someone\u2019s purpose<\/h3>\n

It is easy to say that purpose should be worked out objectively, but what does this mean in \u2018hands on\u2019 practical terms?<\/p>\n

Here\u2019s where I get a bit controversial.<\/p>\n

I think that the most important fact is whether all dealings are at arm\u2019s length.<\/p>\n

I have conducted what I believe is an exhaustive search of every court case and AAT decision considering the sole purpose test or its predecessors. (I won\u2019t list them all here, but if anyone\u2019s interested, email me at bfigot@dbalawyers.com.au<\/a> and I\u2019ll send the list to you.)<\/p>\n

Without exception, in every court case and AAT decision where dealings were not at arm\u2019s length, the sole purpose test was held to be contravened. The flip side is also true: where dealings were at arm\u2019s length, the sole purpose test was held to have been complied with.<\/p>\n

If anyone has an instance where dealings were at arm\u2019s length but the sole purpose test was held to have been contravened, please let me know. However, to the best of my knowledge such an instance does not exist.<\/p>\n

Examples<\/h3>\n

Consider the following real life examples.<\/p>\n

Montgomery Wools<\/em><\/p>\n

In Montgomery Wools<\/em> [2012] AATA 61<\/a>, an SMSF bought all the units in a unit trust. The unit trust used the SMSF\u2019s money to acquire real estate and then the unit trust allowed the real estate to be used as security in respect of a related business\u2019 loans. The real estate was sold and the proceeds used to repay the related business\u2019 debts. The unit trust, and therefore the SMSF indirectly, was left with a loan investment that existed on paper but realistically it had lost its money.<\/p>\n

Naturally, in allowing its assets to be used as security, the unit trust was not acting at arm\u2019s length. The ATO held that the SMSF failed the sole purpose test and the AAT agreed.<\/p>\n

On an interesting side note, the SMSF met the arm\u2019s length rules in the SIS Act as the SMSF itself had not engaged in the non-arm\u2019s length dealings. Rather, the unit trust had had the non-arm\u2019s length dealings and the unit trust is not regulated by the SIS Act. That being said, the ATO in their decision impact statement said that they might dispute this point if it ever arises again.<\/p>\n

I use Montgomery Wools<\/em><\/a> to illustrate that when I say all dealings should be at arm\u2019s length, I do mean all dealings. Consideration should be given not just to the SMSF\u2019s dealings but to the dealings of all parties who directly or indirectly have involvement with the SMSF.<\/p>\n

AAT Case 6059 (1990) 21 ATR 3477<\/em><\/p>\n

A small super fund was by run by Mr D. Mr D had a \u2018penchant, indeed [a] positive zeal for investing a considerable part of the trust funds in a manner not normally adopted by trustees\u2019. This included investing in a real estate development unit trust. Once the fund was invested in these investments, the fund felt compelled to make a number of interest free loans to the investment entities (eg, the unit trust). The ATO took issue and said that the fund failed the then equivalent of the sole purpose test.<\/p>\n

However, the AAT ultimately found that \u2018the non-payment of interest on monies loaned in all these instances, arose from practical commercial considerations in each case and not from any desire … of benefiting the entities to whom the funds were loaned\u2019. That is, at the risk of putting words in the AAT\u2019s mouth, the interest free loans were held to be at arm\u2019s length and the then sole purpose test equivalent was met.<\/p>\n

Conclusion<\/h3>\n

The sole purpose test is crucial and funds that do not comply with it can risk serious penalties. However, so long as care is taken to ensure that dealings are at arm\u2019s length, I dare say there is an extremely strong chance that the sole purpose test will be complied with.<\/p>\n

* * *<\/p>\n

This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional.<\/p>\n

\"Print<\/a><\/div>\n","protected":false},"excerpt":{"rendered":"

Could I be controversial? If dealings are at arm\u2019s length, the sole purpose test will be met. This is not how most people think of or explain the sole purpose test. Indeed, this is not how the ATO in SMSFR 2008\/2 approach the sole purpose test. Also, it is not how courts or the AAT [read more<\/a>]<\/p>\n","protected":false},"author":11,"featured_media":4686,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[33],"tags":[],"ppma_author":[136],"yoast_head":"\nThe sole purpose test \u2014 a new way to answer an old problem | Leading SMSF Law Firm<\/title>\n<meta name=\"description\" content=\"A convenient new way to ensure that the sole purpose test is met!\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.dbalawyers.com.au\/smsf-compliance\/sole-purpose-test-new-way-answer-old-problem\/\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"Bryce Figot\" \/>\n\t<meta name=\"twitter:label2\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"5 minutes\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\/\/schema.org\",\"@graph\":[{\"@type\":\"WebPage\",\"@id\":\"https:\/\/www.dbalawyers.com.au\/smsf-compliance\/sole-purpose-test-new-way-answer-old-problem\/\",\"url\":\"https:\/\/www.dbalawyers.com.au\/smsf-compliance\/sole-purpose-test-new-way-answer-old-problem\/\",\"name\":\"The sole purpose test \u2014 a new way to answer an old problem | Leading SMSF Law Firm\",\"isPartOf\":{\"@id\":\"https:\/\/www.dbalawyers.com.au\/#website\"},\"primaryImageOfPage\":{\"@id\":\"https:\/\/www.dbalawyers.com.au\/smsf-compliance\/sole-purpose-test-new-way-answer-old-problem\/#primaryimage\"},\"image\":{\"@id\":\"https:\/\/www.dbalawyers.com.au\/smsf-compliance\/sole-purpose-test-new-way-answer-old-problem\/#primaryimage\"},\"thumbnailUrl\":\"https:\/\/www.dbalawyers.com.au\/wp-content\/uploads\/2013\/10\/SMSF-sole-purpose-test.jpg\",\"datePublished\":\"2013-11-03T13:00:22+00:00\",\"dateModified\":\"2022-03-07T05:16:12+00:00\",\"author\":{\"@id\":\"https:\/\/www.dbalawyers.com.au\/#\/schema\/person\/21df751f40981297a0f6417071b6a63e\"},\"description\":\"A convenient new way to ensure that the sole purpose test is met!\",\"inLanguage\":\"en-US\",\"potentialAction\":[{\"@type\":\"ReadAction\",\"target\":[\"https:\/\/www.dbalawyers.com.au\/smsf-compliance\/sole-purpose-test-new-way-answer-old-problem\/\"]}]},{\"@type\":\"ImageObject\",\"inLanguage\":\"en-US\",\"@id\":\"https:\/\/www.dbalawyers.com.au\/smsf-compliance\/sole-purpose-test-new-way-answer-old-problem\/#primaryimage\",\"url\":\"https:\/\/www.dbalawyers.com.au\/wp-content\/uploads\/2013\/10\/SMSF-sole-purpose-test.jpg\",\"contentUrl\":\"https:\/\/www.dbalawyers.com.au\/wp-content\/uploads\/2013\/10\/SMSF-sole-purpose-test.jpg\",\"width\":300,\"height\":218,\"caption\":\"SMSF sole purpose test\"},{\"@type\":\"WebSite\",\"@id\":\"https:\/\/www.dbalawyers.com.au\/#website\",\"url\":\"https:\/\/www.dbalawyers.com.au\/\",\"name\":\"DBA Lawyers\",\"description\":\"Leading SMSF Law Firm\",\"potentialAction\":[{\"@type\":\"SearchAction\",\"target\":{\"@type\":\"EntryPoint\",\"urlTemplate\":\"https:\/\/www.dbalawyers.com.au\/?s={search_term_string}\"},\"query-input\":\"required name=search_term_string\"}],\"inLanguage\":\"en-US\"},{\"@type\":\"Person\",\"@id\":\"https:\/\/www.dbalawyers.com.au\/#\/schema\/person\/21df751f40981297a0f6417071b6a63e\",\"name\":\"Bryce Figot\",\"image\":{\"@type\":\"ImageObject\",\"inLanguage\":\"en-US\",\"@id\":\"https:\/\/www.dbalawyers.com.au\/#\/schema\/person\/image\/a9a812be4056bdc150ca270634702d72\",\"url\":\"https:\/\/www.dbalawyers.com.au\/wp-content\/uploads\/2024\/03\/bryce.jpg\",\"contentUrl\":\"https:\/\/www.dbalawyers.com.au\/wp-content\/uploads\/2024\/03\/bryce.jpg\",\"caption\":\"Bryce Figot\"},\"description\":\"Bryce is also recognised as one of Australia's leading SMSF lawyers. 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