Court finds Aussiegolfa's lease to related party complied with SMSF sole purpose test

Aussiegolfa Pty Ltd (Aussiegolfa) as trustee of the Benson Family SMSF (Fund) acquired units in a sub-fund of a managed investment scheme. The sub-fund then used the money invested to acquire a property which it proposed to lease to the daughter of the Fund's sole member.

The Full Court of the Federal Court found that the units acquired by Aussiegolfa did constitute an in-house asset, however, the lease to the daughter of the Fund’s sole member would not cause Aussiegolfa to breach the sole purpose test.

The decision is regarded as significant in the sense that it provides important commentary on the application of the sole purpose test in relation to an SMSF’s dealings with related parties.

 

Background

Aussiegolfa acquired units of a particular class in the DomaCom Fund. Those units were a separate class of units in the DomaCom Fund (ultimately held by the Full Federal Court, to be a separate, 'distinct' trust (Sub-Trust)). The investment was associated with the acquisition of a property in Burwood by the trustee of the Sub-Trust, - namely the DomaCom Fund's responsible entity. The units acquired by the Fund in the Sub-Trust made up 7.83% of the assets owned by the Fund.

The law requires that an SMSF complies with the following rules:

  • in-house asset rules, whereby no more than 5% of the SMSF's assets can consist of in-house assets;[1] and
  • the sole purpose test.[2]

In July 2017, the Commissioner of Taxation made a declaration that the acquisition of the units by Aussiegolfa amounted to an in-house asset since it was 'an investment in a related trust' which was not a 'widely held unit trust'.

Aussiegolfa sought a determination from the Federal Court, seeking declaratory relief that the units acquired in the sub-fund were not an in-house asset and that the proposed leasing of the property to SMFS's sole member would not breach the sole purpose test.

The Federal Court judge decided that the units did constitute an in-house asset and that the leasing of the property to the sole member's daughter would cause the Fund to breach the sole purpose test. Aussiegolfa then appealed against the judgement to the Full Court of the Federal Court.

The Full Court of the Federal Court decided that the primary judge was correct in deciding that the investment in units amounted to an in-house asset, but was incorrect in deciding that the proposed lease would breach the sole purpose test.

In-house asset rule

25% of the units in the sub-fund were held by the Fund's sole member, Mr Benson, 50% were held by Mr Benson's mother and the remaining 25% by Mr Benson's sister. The Full Court held that the exception to the in-house asset definition - i.e. where the investment is in a 'widely held unit trust' - did not apply. The court found the units in the sub-fund of the DomaCom Fund were a 'distinct trust' — and not simply part of the larger DomaCom Fund - and were not 'widely held'.

Sole purpose test

To determine whether the sole purpose test is met, section 62 of the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act) requires that the Fund is being maintained:

  • for one or more of the core purposes; or
  • for one or more core purposes and one or more ancillary purposes.

The Full Court of the Federal Court stated:

  • there was no evidence to support the primary judge's findings that the purpose of Aussiegolfa's original investment in the DomaCom Fund in 2015 was to provide accommodation to a relative of its sole member;
  • it may be that the purpose in 'maintaining its investment' was to provide accommodation to a relative, but it was 'difficult to square' with the purpose of Aussiegolfa in 'acquiring the units';
  • the finding of the primary judge with respect to the purpose of acquisition of the units could not stand;
  • the word 'purpose' in the definition of section 62 concerns the way the fund is being maintained and does not look to the subjective factors motivating the trustee; and
  • the statutory context of section 62 does not suggest that a fund entering into a transaction with a related party would mean that it does not satisfy section 62.

The Full Court was then required to re-consider whether the Fund would be maintained other than for the core purposes or for a core purpose and an ancillary purpose by the Sub-Trust leasing the residential property to a relative of the sole member.

The Full Court held that upon leasing of the property to Mr Benson's daughter, the Fund was being maintained for purposes required by section 62 and made a declaration to this effect. Key reasons for the decision were:

  • Steward J looked to the purpose of Aussiegolfa and not that of Mr Benson. It could be said that the purpose of supplying accommodation to Mr Benson's daughter was held by the trustee of the Sub-Trust and not as the purpose of Aussiegolfa. Accordingly, there was no sufficient connection between the purpose of Aussigolfa and that of the trustee of the Sub-Trust;
  • the fact that the units in the DomaCom Fund were acquired by the Fund in 2015 and the DomaCom Fund entered into the lease in 2017 pointed to the fact that the purpose of Aussiegolfa's acquisition of the units was not for the purpose of benefitting Mr Benson's daughter;
  • the rent being charged was the same as the two previous tenants i.e. market rent;
  • there did not appear to be any financial or non-incidental benefit by Mr Benson's daughter or Mr Benson himself;
  • the 'comfort or convenience' the daughter obtained from leasing the property was merely an incidental benefit;
  • the fact that Mr Benson wanted to 'test' the ability of an SMSF to enter into a lease with a related party was not a relevant factor as it went towards motive and not 'purpose'; and
  • the Fund's investment policy was not affected by the leasing of the property to Mr Benson's daughter.

ATO's Decision Impact Statement

In its Decision Impact Statement of 3 December 2018, the ATO considered that the decision of the court is referrable to the particular facts of the case and that the case is not authority for the proposition that an SMSF trustee can never breach the sole purpose test by leasing to a related party of the fund simply because market rent is charged.

The ATO is considering whether to update SMSFR 2008/2 in light of the decision.

The ATO, through its solicitors, announced that it will not be seeking special leave to appeal the decision of the Full Court of the Federal Court.

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[1] Section 84, SIS Act.

[2] Section 62, SIS Act.