The role of superannuation solely as an investment vehicle to fund retirement is a core underpinning of the structure, but one that is continually being challenged.

Without actively discouraging the use of superannuation to save for retirement, the introduction of new pension account transfer balance caps on 1 July 2017 at least prompt some in the higher-net worth segment to consider the need for alternative or complementary mechanisms.

"I think another one that comes up on something like a two- to three-year cycle is the access for super to fund home purchases…even though the Government came up with the new home buyer scheme last budget, there's a push on again to widen that," says Peter Hogan, head of education and technical at the SMSF Association.

More recently, there has also been discussion of making super assets available to fund personal medical expenses--something which is already available under existing conditions of release including compassionate grounds. But this is only in very limited circumstances, and is subject to some quite stringent requirements and Australian Prudential Regulation Authority (APRA) approval.

A case that is currently under appeal, involving ASX-listed company Domacom and the Australian Tax Office, possibly goes a step further in seeking to challenge restrictions on SMSF's owning residential investment property.

While unable to comment directly on the case, Hogan reminds SMSF trustees that issues around the ownership of property inside an SMSF relate directly to the sole purpose test.

"It doesn't matter what the asset is--whether it's a collectible, artworks or property--when assessing whether the SMSF has a retirement purpose, the regulator will look to the investment decisions of the trustees and will run the ruler over those in that context.

"The sort of things they look at is to see if the trustees genuinely believe that this is an investment to improve their retirement savings, or is it for some other more immediate benefit, either for them as trustees, or relatives or businesses related to them...and whether some more immediate benefit has influenced the investment decisions they've made," Hogan says.

ATO ruling on sole purpose test

He points to a 2008 ruling, SMSFR 2008/2 on the sole purpose test--which is in section 62 of the Superannuation Industry (Supervision) Act 1993. This sets out in detail that any trustee who maintains an SMSF for other purposes other than providing retirement or death benefits contravenes section 62.

Under the ruling:

A trustee must maintain an SMSF in a manner that complies with the sole purpose test at all times while the SMSF is in existence. This extends to all activities undertaken by the SMSF during its life cycle, which broadly encompasses:

  • accepting contributions
  • acquiring and investing fund assets
  • administering the fund (including maintaining the structure of the fund)
  • employing and using fund assets
  • paying benefits, including benefits on or after retirement.

As Hogan explains: "The ATO is not saying that just because there's an inherent benefit of a more immediate nature, that you can't make that investment, for example, it doesn't matter whether you're a SMSF trustee or an individual investor, if you invest in this asset, you'll likely receive some benefit for that".

As an example, he points to the old Coles Myer card, which was provided to all shareholders in the then-separately ASX-listed companies, who received a 5 per cent discount on all purchases.

"You didn't have to use it, but company didn't differentiate between shareholders. That was an embedded benefit that every shareholder was entitled to receive."

"The ATOs view was that there was no cost to the SMSF in investing in Coles Myer shares or to trustees in using that," and so there was no barrier to SMSF investors holding those shares in their portfolio.

However, Coles Myer subsequently changed the terms and conditions, including having two classes of shareholders--one that continued to get access to the discount card, and another class didn't, with the latter shareholders instead receiving an increased dividend.

At that point, the ATO ruled all super funds could now only hold the shares that give the increased dividend, not those where they get access to the discount card, "because it now has an impact on the returns that investors receive," Hogan says.

"When it comes to property investments, they're applying the same ruler over it…anywhere there's an arrangement involving residential property and related parties in particular, that's a red flag to the regulators."

He makes a clear distinction between this and the ownership of a business premises within an SMSF, where there's an exception to that rule, "but it doesn't arise in relation to residential property".

The arms-length nature of any residential property investments is also key.

"Can you own residential property where a related party pays rent and doesn't pay full market rent? Absolutely not - that means that they're getting a present-day benefit, and they access it through an investment owned through the superannuation," Hogan says.

"That same lease to a related party is also an in-house asset…so even if that same child pays full market rent, the whole value of the residential property counts as an in-house asset. Where that value exceeds 5 per cent of the market value of the fund assets, there is a breach of the in-house assets test and the lease arrangement must be wound up."

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Glenn Freeman is Morningstar's senior editor.

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