SMSF sole purpose test — section 62 of the SIS Act

What section 62 requires

Section 62 of the Superannuation Industry (Supervision) Act 1993 contains the sole purpose test. This test requires an SMSF to be maintained for the sole purpose of providing retirement benefits to members, or to dependants on the member's death before retirement.

Section 62 also recognises permitted ancillary purposes. These include the provision of death, ill-health and termination of employment benefits. These purposes are considered consistent with the SMSF’s primary purpose.

Breach of section 62 constitutes a strict-liability civil penalty contravention.

ATO ruling SMSFR 2008/2

SMSFR 2008/2 provides guidance on the application of the sole purpose test as outlined in section 62 of the SIS Act. This ruling clarifies that the test is viewed holistically and objectively, requiring consideration of all circumstances relating to the fund.

The ATO assesses whether the fund’s activities are solely for the purpose of providing retirement benefits to members. Even a minor non-retirement benefit can impact compliance with the sole purpose test if it is determined to be more than incidental, remote or insignificant.

The ATO may also apply sections 65 and 66 in conjunction with the sole purpose test. These sections relate to lending to members and the acquisition of assets from related parties, respectively.

Investment strategy obligations

Trustees of self-managed superannuation funds (SMSFs) are required to prepare and give effect to a written investment strategy under regulation 4.09 of the SIS Regulations. This strategy must address specific considerations including risk, return, diversification, liquidity, the ability to discharge liabilities, and whether to hold insurance for members.

The investment strategy is not a static document; it must be reviewed regularly. This ensures the strategy remains appropriate given the fund’s circumstances and the SMSF’s sole purpose.

Trustees must maintain contemporaneous records to demonstrate how investment decisions align with the documented investment strategy. These records serve as evidence of compliance.

Audit requirements

Each year, an SMSF must be audited by an approved SMSF auditor registered with ASIC. The auditor’s role includes assessing the fund’s compliance with the *Superannuation Industry (Supervision) Act 1993* (SIS Act) and the *Superannuation Industry (Supervision) Regulations*. This assessment specifically covers the sole purpose test.

During the audit, the auditor evaluates whether the SMSF meets the requirements of the SIS Act and SIS Regulations. If the auditor identifies a contravention, they must report it to the ATO via an Auditor/Actuary Contravention Report (ACR) if reporting thresholds are met.

Trustees are responsible for ensuring the SMSF complies with all legislative requirements. Failure to do so may result in administrative penalties under section 166 of the SIS Act.