Issue
Does an SMSF breach the sole purpose test when a work of art, which is owned by the SMSF, is displayed in a residence belonging to a member at no cost to the member?
Decision
Yes, an SMSF will generally breach the sole purpose test when a work of art is displayed in a residence belonging to a member at no cost to the member.
Facts
An SMSF invests in works of art.
Some of the works of art are housed in the residence of the members of the fund.
The member does not pay the fund for the use of its asset.
Reasons for Decision
Australian Prudential Regulation Authority (APRA) Superannuation Circular No.III.A.4 discusses the sole purpose test. The circular states the following at paragraph 6: The sole purpose test provides that a regulated superannuation fund must be maintained solely for at least one of the legislated core purposes or for at least one of those core purposes and for one or more of the prescribed or approved ancillary purposes .
Some guidance of the approach to be taken regarding the sole purpose test can be found in Case 43/95 95 ATC 374; AAT Case 10,301 31 ATR 1067. In the joint decision of the Tribunal the following statement was made: In addition to the above, it may be that there are isolated incidents which, viewed in the overall context of the way in which the fund is being maintained, are so incidental, remote or insignificant, that they cannot, having regard to the objects sought to be achieved by the Act, be regarded as constituting a breach of the sole purpose test. Such incidents will be rare. The legislature, by adopting the "sole purpose" test, has expressly determined that a strict standard of compliance should be adhered to. Under the Act, the test requires more than the presence of a dominant or principal purpose in the maintenance of a superannuation fund - it requires an exclusivity of purpose commensurate with that purpose being the "sole purpose".
The question of whether the sole purpose test has been contravened needs to be determined on the facts of each case. As can be seen from Case 43/95 the standard is very high. Generally where a fund acquires an asset which is utilised by the member at no cost, a breach of the sole purpose will be considered to have occurred.