The SISA^[145] requires the trustees to ensure that the SMSF is maintained solely for one or more of the allowable core purposes and, in addition, may also be maintained for one or more of the allowable ancillary purposes. The allowable core purposes are the provision of benefits for each member on their retirement, attainment of a prescribed age or death prior to retirement or attaining the prescribed age. The allowable ancillary purposes are the provision of benefits for each member on termination of employment, cessation of work due to ill-health, death after retirement or attainment of a prescribed age, or a benefit approved by the ATO. The ‘sole purpose test’ is a conceptual test that, when satisfied, demonstrates that the SMSF has in fact been maintained solely for allowable purposes (‘exclusivity of purpose’) and requires a higher standard than maintenance of the SMSF for a dominant or principal purpose. The ATO provides guidance on their minimum expectation for audit evidence in respect of the listed provisions in Part B of the Auditor’s Report.^[146] The guidance for s62 SISA states, among other things: “The auditor should check that the trust deed established the fund solely for the provision of benefits for fund members (upon their retirement or turning 65 years old) and their dependants (in the case of the member’s death before retirement)”.

The trustees of a SMSF are required to maintain the fund in a manner that complies with the sole purpose test at all times while the SMSF is in existence. This extends to all activities of the SMSF including:

• accepting contributions;
• acquiring and investing the SMSF’s assets;
• administering the funds;
• employing and using the SMSF’s assets; and
• paying benefits, including those benefits on or after retirement.

In assessing whether a SMSF has complied with the sole purpose test, the auditor may refer to the ATO’s Ruling SMSFR 2008/2^[147] on the application of the sole purpose test to circumstances where the SMSF is maintained for the purposes prescribed while providing benefits, particularly to members or related parties, other than those specified in section 62 of the SISA. SMSFR 2008/2 states that a SMSF may still satisfy the sole purpose test despite the provision of benefits not specified in section 62, if the benefits are “incidental, remote or insignificant”. In order to determine whether the benefits are incidental, remote or insignificant, the circumstances surrounding the SMSF’s maintenance need to be viewed “holistically and objectively”. Case law provides authority to the practical application of section 62. The ATO has reviewed Ruling SMSFR 2008/2 and issued a decision impact statement as a result, to further clarify their position as Regulator.^[148]

In assuring compliance with the sole purpose test, the auditor looks for the provision of current day benefits, being benefits to a member or related party before the member’s retirement, employment termination or death, and assesses whether those benefits fail the sole purpose test. Furthermore, the SISR^[149] contains strict regulations in relation to collectables and personal use assets. IHA are discussed further in paragraphs 348 to 351, while collectables and personal use assets are discussed further in paragraphs 343 to 347.

Current day benefits are likely to fail the sole purpose test if the benefit:

• was negotiated or sought-out by the trustees;
• has influenced the decision making of the trustee;
• has been provided at a cost or financial detriment to the SMSF; and
• is part of a pattern or preponderance of events which, when viewed in their entirety, amount to a material benefit being provided that is not specified under subsection 62(1).

Current day benefits are more likely to comply with the sole purpose test if:

• the benefit is an inherent and unavoidable part of activities for allowable purposes;
• the benefit is remote, isolated or insignificant;
• the benefit is provided on arm’s length commercial terms, at no cost or financial detriment to the SMSF;
• the trustees comply with the covenants in section 52B of the SISA; and
• the benefit relates to activities which are part of a properly considered and formulated investment strategy.

The sole purpose test is complemented by other restrictions in SISA relating to dealings with members and related parties, such as prohibitions or restrictions on:

• transactions not at arm’s length;^[150]
• loans or financial assistance to members or relatives;^[151]
• acquisitions from related parties;^[152]
• charges over assets;^[153]
• assignment of, or charges over, member’s benefits;^[154]
• SMSF assets not held separately from the members’ personal assets;^[155]
• acquisition of IHA in excess of 5 per cent of the total market value of the SMSF assets;^[156] and
• collectables and personal use assets.^[157]

Breaches of one or more of these restrictions are usually indicative of circumstances establishing a breach of the sole purpose test.

Running a Business

The auditor remains alert to circumstances which indicate that the SMSF is running a business or conducting operations which may be akin to running a business, as this activity may breach the sole purpose test. Indications that a business is being conducted by the SMSF may include revenues from trading activities, employing staff and paying operating expenses. A business is not usually administered for the sole purpose of providing the allowable benefits to members or beneficiaries of the SMSF, as there is an inherent risk that running a business may jeopardise the members’ benefits.^[158] Although the operation of a business is not prohibited by the SISA, specific additional obligations need to be met by the fund to ensure on-going SISA compliance.

If a trustee is also an employee of the business, payment of salary or wages to the trustee must be on an arms-length basis. The auditor assesses all circumstances of a SMSF running a business to determine whether it is in breach of the SISA or SISR. It is also essential to ensure that the deed of the fund permits the trustee to operate a business.

SMSFs that engage in high volume trading of derivatives, listed securities, real property or other investments, or a series of property developments, may be running a business for purposes other than solely for providing specified benefits to members and beneficiaries. For SMSFs conducting activities of this kind, the auditor considers whether the activities are justified in giving effect to the investment strategy.

Units in a Related Unit Trust

Investments in related unit trusts, where trustees or members of the SMSF are also trustees of the related unit trust, are common SMSF investments. The auditor considers the sole purpose test in light of the investments held in, and by, the related unit trust, to ensure that the investments held are for the long-term provision of allowable benefits to members and not to provide other benefits to the trustees, members or their relatives. The auditor may also need to consider whether the investment breaches the prohibition on acquisitions from related parties, the prohibition on borrowings, or exceeds the IHA limits.^[159] SISA obligations vary depending on the date the fund invested and whether the investment falls under the exception in Division 13.3A of the SISR.