A recent survey done by Australian Taxation Office (ATO) reveals that 30% of people surveyed (people with DIY super funds) did not have clear understanding of what Sole Purpose Test means. This result is surely a big concern. Sole Purpose Test is one of the fundamental guidelines of a DIY super fund and failing to adhere to it might result in severe penalties.

What Does It Mean

The simple definition is that all the investment decisions have to be made so that all the benefits from that investment decision are enjoyed only in the future (in retirement) and not in the present. You cannot enjoy any benefit from your DIY super investments today - they are all for the future.

So What Are Some Of The Common Breaches

Running A Business: ATO does not permit a DIY super fund to run a business because according to ATO running a business does not meet the sole purpose of providing benefits for the members in the future.

Holiday Homes: Buying a holiday or an investment home and then enjoying it rent free during your holidays is a breach. The home is owned by the super fund and hence you can enjoy its benefits only in the retirement. If you wish to spend time in the house then you have to pay rent to the fund (at market rates). However if the market value of the house is more than 5% of the total assets of the super fund, then you cannot lease the house from the super fund (even if you pay rent at market rates). This is because of ATO’s rule - DIY super funds are restricted from lending to, investing in, or leasing to, a related party of the fund more than 5% of the fund’s total assets.

Membership Benefits: Lets say you buy shares in a golf course and as a part of shareholder benefits you are entitled to free membership of the golf course. If you make use of the free membership then you are breaching the sole purpose test.

Discounts: Lets say you buy shares in a supermarket and as a part of shareholder benefits you are entitled to discounts from the supermarket. If you make use of the discounts then you are breaching the sole purpose test.

Artwork and Jewellery: You should not get access to any artwork, wine, collectables or jewellery owned by the diy super fund.

Helping Others: No investment can be made with the aim of helping someone else..

Lending: Cannot lend money to your friends or relatives…

‘Sole Purpose Test’ is one of the fundamental topics you need to understand fully before moving into DIY super funds. The consequences of failing to meet the test can be quite severe. From all that I read on ATO website, they are very serious about catching the culprits….You cant get away.

Have I missed any of the common breaches of this test ?

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