The sole purpose test under the SIS Act reflects the fundamental reason for the existence of a superannuation fund. The fundamental reason is to provide superannuation benefits to members on retirement or to members dependents on the death of a member.

The sole purpose test is divided into core and ancilliary purposes. The trustee of a SMSF is required to ensure that the fund is maintained for at least one of the following core purposes:

• paying benefits to members on or after retirement from gainful employment;
• paying benefits to members when they have reached the prescribed age of 65; or
• paying benefits on the member’s death to the member’s dependents or legal representative.

Alternatively, the sole purpose test can be satisfied if the fund is maintained for at least one core purpose and one or more ancillary purposes. A fund cannot be maintained for ancillary purposes only.

While the core purposes deal specifically with the provision of retirement benefits, benefits on attaining age 65 or death benefits, the ancillary purposes can cover the provision of any benefits permitted under SIS Act Part 6, including resignation/ retrenchment benefits, disability benefits, post-retirement death benefits, and financial hardship, welfare and compassionate benefits.

As the sole purpose test is one of the key prudential requirements for complying superannuation funds, it is strenuously monitored by the Australian Taxation Office.

The sole purpose test is a civil penalty provision in the SIS Act, and civil and criminal penalty penalties may be imposed if the test is breached. In addition, a breach of the sole purpose test may result in the fund losing it’s complying fund status if the fund does not satisfy the compliance test.