The Sole Purpose Test: What you need to know

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The Sole Purpose Test: What you need to know

You’re running an SMSF to set yourself up for retirement, right? Well, the “Sole Purpose Test” helps to keep you on track.

The Sole Purpose Test is a rule that ensures your SMSF is run to deliver your retirement or death benefits.

You’re probably already running your fund to provide income for yourself in retirement, but passing this test is critical – otherwise you might be made “non-compliant” and you’ll lose your tax concessions.

Critically, you could also face civil or criminal penalties. We don’t wish to scare you; but you need to understand what investments to avoid.

If you make an investment through your SMSF, which instead of being made for growing your super is motivated by financial benefits outside the fund, you’re going to breach the test.

Let’s take a look at some examples of Sole Purpose Test no-nos;

  • Investing in a holiday house property so you and your friends can use the property each summer
  • Purchasing an artwork and displaying it in your business place
  • Buying shares in a company for the main purpose of getting a discount card for that company

Although the test sounds simple, failing it will throw a spanner in the works. If you’re unsure of how the Sole Purpose Test might apply to you, talk to an SMSF Specialist today.