The sole purpose test sits behind everything

An SMSF must be maintained for the sole purpose of providing retirement benefits to members, or death benefits to their dependants. Any present-day personal benefit to a member or related party can breach this test.

Keeping fund and personal Assets separate

Fund assets must be held in the fund's name and kept separate from personal and business assets. This separation is an operating standard, not just administrative tidiness. Mixing fund money with personal money, or using a fund asset personally, blurs the line the system depends on.

Collectables and personal-use assets

Investments such as art, wine, classic cars, jewellery and memorabilia are allowed, but strict rules apply because these assets are easy to enjoy personally. These assets generally cannot be leased to or used by a related party, cannot be stored in a member's private residence, and decisions about their storage must be documented.

Property is a frequent flashpoint

Residential property owned by the fund cannot be lived in or rented by members or their relatives, and the fund cannot acquire residential property from a related party. Business real property is treated differently: the fund may own business premises and Lease them to a member's business, but only at Market Value on genuine, arm's-length commercial terms, with rent actually paid on time.

A hypothetical example

Consider a hypothetical trustee, Maria, whose fund owns a beach apartment as an investment. During a vacant weekend, she stays there without paying market rent. This constitutes a personal benefit from a fund asset, breaching the sole purpose test and the separation rules, regardless of intention.

The consequences

Personal use of fund assets can lead to a reported contravention, administrative penalties imposed on trustees personally, and directions from the ATO to rectify the breach. In serious or persistent cases, the fund can be made non-complying, which carries severe tax consequences.

Loans and financial assistance are strictly off limits

Closely related to personal use is the outright ban on lending fund money to, or providing financial assistance to, members and their relatives. This includes obvious loans, but also less obvious help such as using fund assets as security for a personal Loan or a guarantee. The prohibition is absolute.

Any dealing between the fund and a related party — buying, selling, leasing or investing — must be on genuine commercial terms. Non-arm's-length arrangements can cause the resulting income to be taxed at the highest marginal rate as non-arm's-length income.

The penalties involved

When a breach is identified, the ATO has a range of responses. Administrative penalties are imposed on trustees personally and cannot be paid from the fund. From 1 July 2026 a penalty unit is $364, and serious breaches such as prohibited loans or borrowings carry 60 penalty units, or $21,840, applied to each individual trustee.