Is it worht it?
Jim had his eye on that antique sports car for some time but it was always just out of his reach. An acquaintance suggested to him why wait – he knew a way that he could have his cake and eat it as well.
All he needed to do was to set up a self managed super fund and pool all his super savings into this one new fund and he could then invest in whatever he wanted to.
He could invest in that car and then it would be his to do with what he liked.
What Jim’s acquaintance didn’t tell him was that:-
- Self-managed super funds are bound by the sole purpose test, which states that superannuation investments can have no other purpose but to provide retirement benefits for the owner. That’s why the Government gives people a tax break for money earned from superannuation.
- The consequences of failure of the sole purpose test are severe.
- First, any such failure will mean that the fund ceases to be a complying fund. This would mean that the fund might receive a tax bill equal to 47% of the total value of the assets of the fund.
- Second, if a trustee fails to maintain a fund for a sole purpose the trustee might be liable to a fine of up to $220,000 and or imprisonment of up to 5 years.
If Jim was to carry out the above actions and go ahead and drive and/or race his new pride and joy he would be in breach of the sole purpose test and could lose all, or a significant part of his super and/or end up in prison – all from these seemingly simple and innocent actions on his part.
The acquisition by a fund of “life style assets” such as holiday home, artwork, or vintage cars, normally has sole purpose test implications. Purchases of these types of assets by a fund are normally justified by expectation that the assets’ values will be subject to capital growth. However the problem is that members normally want to use the holiday home, or hang the artwork at home, or drive the vintage car. Such applications of an asset will cause there to be breaches of the sole purpose test; that test cannot normally be over come by leasing the asset at an arm’s length rent to the member because of the in house asset test restrictions.
So it may not be worth having those lifestyle assets in your super fund – always seek competent professional advice before seeking to place any such assets in your super fund.