The Full Federal Court recently held that although Aussiegolfa, a self-managed superannuation fund (SMSF) breached the in-house asset rules, it did not breach the sole purpose test. In this article, we explore the Decision Impact Statement (DIS) issued by the Australian Taxation Office (ATO) on 3 December 2018 in response to the Full Federal Court’s decision, as espoused in its Ruling SMSFR 2008/2.
The ATO’s view of the Aussiegolfa’s Decision: a summary
1. Sub-fund as a Separate Trust
As discussed in our earlier article, Aussiegolfa is a sole member SMSF which, together with the member’s relatives in 2015, invested in the units of a sub-fund of a managed investment scheme which acquired a student rental apartment property, ran by DomaCom. The ATO took the SMSF to court when the third tenant was the member’s daughter, despite she paying market rental.
In the (DIS), the ATO noted the Court’s finding that the sub-fund constituted a separate trust, based on the facts of the arrangement. The ATO also stated that the decision provides valuable guidance in determining when a new trust has been created under the general law concept of a trust.
The ATO also noted it does not expect this case to have a significant impact on traditional multi-class managed funds.
2. In-house Asset Rules
As discussed, the Full Federal Court upheld the decision that Aussiegolfa breached the 5% investment rule as it had 7.83% interest in the relevant sub-fund trust asset.
In the (DIS), the ATO stated it will continue to use its power under section 71(4) of the Superannuation Industry (Supervision) Act (SISA) in issuing determinations of what it deems to be an in-house asset of an SMSF.
3. Sole Purpose Test
In the (DIS), the ATO stated it is the purpose of making and maintaining a fund’s investment that is central to identifying if there is a contravention of the sole purpose test. It also noted the observations of the court that where an SMSF is maintained for a collateral purpose, and a contravention of the sole purpose test could be present if the circumstances indicated that leasing to a related party had influenced the fund’s investment policy.
It further stated that the Commissioner considers that the decision of the Court is referrable to the particular facts of the case. The important aspects of the factual arrangement were that:
- the Burwood Property had been leased to two tenants unrelated to the SMSF for two years prior to the premises being leased to the daughter of the member of the SMSF
- the daughter paid equivalent market rent to that paid by the two previous tenants, and
- there was no suggestion that the leasing of the Burwood Property to the daughter influenced the SMSF investment policy.
Furthermore, the ATO do not consider that the case is authority for the proposition that a superannuation fund trustee can never contravene the sole purpose test when leasing an asset to a related party simply because market-value rent is received.
Is the ATO’s view the same as the Full Federal Court’s?
In the (DIS), the ATO is effectively ‘limiting’ the Full Federal Court’s decision on Aussiegolfa to the facts of the case and the ATO is of the view that the sole purpose test may be breached if:
- residential premises are leased to related party at market rental;
- the SMSF is maintained for a collateral purpose;
- leasing to a related party had influenced the fund’s investment policy;
- purpose of making and maintaining a fund’s investment is for the related party.
It is important to apply the main findings of the Full Federal Court in Aussiegolfa to the ATO views above, as identified in brackets below:
- residential premises are leased [not at the outset] to related party at market rental;
- the SMSF is [not] maintained for a collateral purpose [as the SMSF invested in the units of the sub-trust, not the property. The original investment in the units is to provide the SMSF with exposure to a real property investment];
- leasing to a related party had [not] influenced the fund’s investment policy [as the SMSF did not originally acquire the units for the purpose of providing accommodation to the member’s daughter. The continued payment by the daughter of market rent did not diminish or threaten the capacity of the SMSF’s ability to provide superannuation benefits to its member in the future. It continued to receive the same return from this investment];
- purpose of making and maintaining a fund’s investment is [not] for the related party [as the daughter did not derive any benefit from the investment in the units. Benefit the daughter got in the form of student accommodation is not the type of ‘financial benefit’ concerned by the sole purpose test. The test is instead concerned with whether the fund invested for the superannuation benefits of its members in the future is being protected from being eroded, so the fund fulfils its function and purpose of providing benefits to members upon their retirement].
Based on the above, it is questioned whether the current view of the ATO still differs from the Full Federal Court in its interpretation and application of the sole purpose test.
Is the ATO giving itself a mulligan after Aussiegolfa?
As discussed, the use of SMSF funds, which results in the delivery of other unrelated benefits to members of an SMSF or their relatives, does not necessarily mean the sole purpose is breached. Instead it is an objective test and assessment, based on the facts and circumstances of each case. This is not (necessarily) the same as the strict standard or purposeful benefit interpretation as espoused by the ATO in its Ruling or its (DIS) here.
Careful planning and execution of investments with their advisers where related parties are involved should mean SMSF trustees need not to worry when taken to court, and to leave the ATO to use its mulligans instead.
This article was co-authored by Bill Leung, HLB Mann Judd Melbourne