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.Melissa Ramov, Maddocks Lawyers
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 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.
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'.
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:
The Full Court of the Federal Court stated:
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:
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.
For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of the Commercial team.
You can read earlier ClearLaw articles on a range of topics, such as:
 Section 84, SIS Act.
 Section 62, SIS Act.
Qualifications: LLB, Deakin University
Stephen is a member of Maddocks Commercial team. He is a corporate and commercial lawyer, who assists clients across a diverse range of industries including financial services, consumer markets and manufacturing in a wide variety of legal matters.
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He focusses on drafting, advising on and negotiating contracts, transactions and agreements for clients and also assists with providing general corporate advice.
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