Sole Purpose Test, s62(1) Under the sole purpose test, a regulated superannuation fund must ensure that the fund is

maintained primarily for retirement benefits (amongst the other two core purposes) The SMSF must ensure they invest in assets that provide benefits for retirement, and that

the investments do not provide a present benefit for the superannuation fund members The investments also need to be made according to the SMSF trustee’s investment strategy Under section 66(2A) of the SIS Act, a trustee of a complying super fund is allowed to acquire

units in a related unit trust, provided the units were acquired at market value and would not cause the level of the fund’s in-house assets to exceed 5% of the fund’s assets.

However, a problem that may arise is that the fund is investing in a unit trust that holds racehorses and yachts hired out to the public. This may be an issue, because these assets are collectables and personal use assets which are assets generally considered to be kept for personal use or enjoyment. The trustee may be asked to explain how these assets provide retirement benefits and how they are considered as a reasonable investment for the SMSF.

Cases: Swiss Chalet case, APRA v Derstepanian, Vivian, DCT v Fitzgeralds

Lending to Members of Regulated Superannuation Funds, s65 Under s65, a trustee or investment manager of a regulated superannuation fund is able to

loan money or provide financial assistance out of the fund’s resources to a “related party” such as related trusts and companies, but it does not include a member of the fund or a relative of a member.

In this case study, the individuals are planning to use the SMSF to acquire the cars owned by the car rental business, as a way of providing cash for paying off current business debt. This would breach s65 provisions as it would regarded as “financial accommodation to related parties”, as the investment is not be made for the sole purpose of providing for retirement.

Cases: Montgomery Wools Pty Ltd v FCT, JNVQ v FCT

Acquisition of Certain Assets from Members, s66 Under s66, a trustee or investment manager of a superannuation fund must not

intentionally acquire an asset from a related party of the fund, unless the asset being acquired is a listed security, business real property, or an in-house asset that does not exceed 5% of the value of the fund’s total assets

In this case study, the SMSF is allowed to acquire the business real property and lease it back to the manufacturing business, as it is an exception under s66.

There are two conditions that need to be satisfied for the business real property exception:1. The acquiring entity must have an “eligible interest” in the property2. The property must satisfy the “Business use test”

Case: Lock v FCT

Borrowing by Regulated Superannuation Funds, s67 Under s67, a trustee of an SMSF is prohibited from borrowing money except in limited

circumstances. In these limited circumstances, a trustee is able to temporarily borrow for a maximum of 90 days to make benefit payments, to pay a surcharge liability or to settle securities transactions or instalment warrant payments

These borrowings are only allowed if they do not exceed 10% of the fund’s total assets In this case study, the individuals wouldn’t be able to borrow money if they didn’t have

enough money to acquire the cars, as it would breach s67 rules. Case: Tefonu Pty Ltd v ISC

In-house assets, s71 - 85 Under s71, in-house assets are investments, loans or lease arrangements between the

SMSF and related parties. A SMSF cannot invest in or lend money to related parties if the investment or loan exceeds 5% or more of the fund’s total assets

This rule applies to the two acquisitions in the case study: the acquisition of the car rental business owned by ABC and acquisition of the units in the unit trust controlled by ABC.

Case: Montgomery Wools Pty Ltd v FCT

Arm’s Length Investments, s109 Under s109, all investments by a SMSF trustee or investment manager must be made and

maintained on a strict arm’s length basis. All investments must be acquired at their market values. A breach of this section would result in a 45% tax on the non-arm’s length income.

Case: APRA v Derstepanian

Covenants Included in Governing Rules (s52 SIS93) Many of the duties and standards required of trustees are extensively codified in s52 of the

SIS Act. This section includes certain covenants that require the trustee to observe specific standards of behaviour such as: o Act honestly in all matters, exercising skill and due diligenceo Ensuring the trustee’s duties and powers are performed and exercised in the best

interests of the beneficiaries, separating personal assets from the fund’s assets.o Trustees of SMSF are required to sign declaration stating that they understand their

obligations and responsibilities, s104A SIS93 Other main trustee duties and obligations include:

o To comply with the sole purpose test s62 SIS93o To invest the fund’s money only on an arm’s length basiso Not to lend fund money or provide financial assistance to a fund member or relativeo Not to acquire assets, other than money, from members or their relativeso To ensure the fund’s in-house assets remain at or below the 5% levelo Not to borrow money on the fund’s behalf, except for limited recourse borrowing

arrangements and short term borrowings.