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Case Study - Terry and Eileen Lyon

Q.1

Ans. (a)

The Sole Purpose Test

The object of the sole purpose test is to ensure that regulated superannuation funds (SMSFs) are maintained for the purpose of providing benefits to members upon their retirement, or their dependants in the case of the member's death before retirement. The trustee of a regulated superannuation fund must comply with the sole purpose test to be eligible for the taxation concessions available to a complying superannuation fund. A complying superannuation fund is basically a regulated superannuation fund that meets the operational standards of the Superannuation Industry (Supervision) Act 1993 (SISA). In other words, to be a complying fund the fund has to first be a regulated fund. A complying superannuation fund's income will be taxed at the concessional rate of 15%, while a non-complying fund's income will be taxed at 47%.

The sole purpose test is divided into core and ancillary purposes. A regulated fund must be maintained for at least one core purpose OR at least one core purpose and one or more ancillary purposes. It is unacceptable for a fund to be maintained for one or more ancillary purposes only.

(b)

In-house Assets

An in-house asset of a super fund is an asset that is:

a loan to, or an investment in, a related party of the fund

an investment in a related trust of the fund

an asset of the fund that is subject to a lease or lease arrangement between the trustee of the fund (you), and a related party of the fund.

(c)

'In-house assets' are loans to investments in and assets subject to a lease with a related party of the superannuation fund. In general, SMSFs are restricted from lending or leasing more than 5% of the superannuation fund's total assets to a related party of the superannuation fund and are generally restricted from investing more than 5% of the superannuation fund's assets in a related party of the superannuation fund. Some exceptions do exist, including allowing an exemption for 'business real property', which is subject to a lease between the superannuation fund and a related party of the superannuation fund.

(d)

Investment rules are one of the most important requirements of SISA and failure to comply with the rules could result in trustees being fined and/or the superannuation fund losing its complying status.

Loans or financial assistance to members or a member's relative

Trustees are prohibited from lending money or providing financial assistance from the ...