SMSF news – update on the ‘sole purpose test’ in the Aussiegolfa case

Last week the full Federal Court handed down its decision in Aussiegolfa Pty Ltd (Trustee) v Commissioner of Taxation [2018] FCAFC 122, a case concerning the in-house asset rule and sole purpose test for SMSFs. Tom Wood has discussed the implications of this below.

What is the in-house asset rule and the sole purpose test?

SMSFs are regulated by the Superannuation Industry (Supervision) Act, which contains a number of rules and restrictions that SMSFs must abide by. Two of these are the in-house asset rule and the sole purpose test.

• The in-house asset rule in essence requires that a SMSF does not invest in or make a loan to a related trust or entity, unless the value of that investment is less than 5% of the total value of the SMSF.
• The sole purpose test requires that a SMSF is maintained solely for one of the defined “Core Purposes”, and in addition may be maintained for “Ancillary Purposes”. The Core and Ancillary Purposes are primarily concerned with providing retirement benefits to the members – i.e. the SMSF must be maintained to make (and retain) monies for its members on retirement.

What is this case about?

In summary:

• Aussiegolfa Pty Ltd is the trustee of the Benson Family Superannuation Fund (the SMSF), of which Mr Benson was the sole member.
• The SMSF, along with Mr Benson’s mother and the superannuation fund of Mr Benson’s sister and her partner (the Related Parties) all invested in the DomaCom Fund.
• The DomaCom Fund was a unit trust that was a managed investment scheme. It was a widely held unit trust, except that it used different classes of units which gave beneficiaries rights with respect to particular investments (to the exclusion of holders of other classes of units).
• The DomaCom Fund signed a contract to buy a property in Burwood, Victoria (the Burwood Property), and issued a special class of units to the SMSF and the Related Parties. These units:
  • required the SMSF and Related Parties to pay subscription monies for their units, which covered the purchase price and costs of the Burwood Property;
  • provided the SMSF and Related Parties with an exclusive right to distributions of income from the Burwood Property, and required the SMSF and the Related Parties to pay “Class Expenses” (being expenses associated with the Burwood Property); and
  • effectively granted the SMSF and Related Parties a distinct beneficial interest in the Burwood Property separate from any other unitholders in the DomaCom Fund.

For ease of reference, this separate class of units throughout the case was referred to as a separate sub-fund (the Burwood Sub-Fund) within the DomaCom Fund.

• The DomaCom Fund engaged Student Housing Australia as a letting agent for the Burwood Property.
• The first two tenants sourced by Student Housing Australia were persons unrelated to Mr Benson or the SMSF. The third tenant sourced by Student Housing Australia was Mr Benson’s daughter (Ms Benson).  The tenancy to Ms Benson was for the same rent as the first two tenancies and otherwise on arms’ length terms.

What was the previous position of the Federal Court?

The Federal Court previously determined that:

• the units held by the SMSF in the DomaCom Fund, which were those special class units comprising the Burwood Sub-Fund:
  • were an investment in a related trust of the SMSF; and
  • were not an investment in a widely held unit trust,

and therefore the units were an in-house asset which exceeded the 5% allowance; and

• leasing of the Burwood Property to Ms Benson caused the SMSF to breach the sole purpose test.

What is the new position of the full Federal Court?

The full Federal Court:

• confirmed that the units held by the SMSF in the DomaCom Fund were an in-house asset; but
• the lease of the Burwood Property to Ms Benson did not cause the SMSF to breach the sole purpose test.

Why the change concerning the sole purpose test?

In coming to its decision, the full Federal Court placed emphasis on the sole purpose test for a SMSF being concerned more with the way in which the SMSF is maintained, rather than subjective factors (i.e. ulterior/secondary motivations) or whether it is dealing with related parties. Key factors were:

• the “purpose” assessed for the sole purpose test is that of the SMSF, and not of its members (save in their capacity as a director/controller of the SMSF);
• the subjective motivation of a controlling director or trustee is not to be confused with the purpose of the SMSF;
• the rent charged was market rent, and there did not appear to be any financial or non-incidental benefit obtained by Ms Benson in leasing the property (as opposed to any other property);
• The benefit Ms Benson obtained of merely having accommodation was incidental, as was any benefit of Mr Benson by having the SMSF provide accommodation on arms’ length terms;
• Selection of Ms Benson as a tenant may have been a motive of Mr Benson (in his capacity as director of the SMSF), but did not go towards the purpose for which the SMSF was being maintained; and
• The leasing of the property was being handled by Student Housing Australia, which was unrelated.

It was also noted that:

• if the rent was not at market rates, then it is highly likely that the SMSF was not being maintained for a Core Purpose and instead was being maintained to provide discount accommodation to a relative of a member of the SMSF; and
• if the investment policy of the SMSF has been affected by leasing of the property to Ms Benson, then it would also be likely the SMSF was not being maintained for a Core Purpose.

It is possible and perhaps likely that this matter could be appealed to the High Court given that the position of the full Federal Court is unlikely to sit well with the ATO – stay tuned.

If you have any questions regarding the sole purpose test or any superannuation questions, please contact our team today.