In Short: the court has warned trustees that SMSF’s cannot be used for anything other than providing retirement benefits for its members. 

The Federal Court decision in Aussiegolfa Pty Ltd (Trustee) v Commissioner of Taxation [2017][1](“Aussiegolfa”) has reconfirmed the lofty heights required by sections 62, 71 and 82 of the Superannuation Industry (Supervision) Act 1993 (“SISA”). This case concerned two issues – firstly, the interpretation and meaning of ‘in-house assets’ under the “Inhouse Asset Rule” and secondly, whether the Self Managed Superannuation Fund (“SMSF”) could be said to have been maintained solely for one or more of the core purposes specified in s62(1)(a), or an ancillary purpose under s62(1)(b).

This paper will explore both the ‘Sole Purpose Test’ and the ‘In-House Asset’ Rule with commentary provided by Pagone J’s judgement mixed in.

Background to Aussiegolfa

• In March of 2015, Mr Benson’s SMSF invested in 28,080 $1 units in the DomaCom Fund (“DomaCom”) – an investment scheme which enables investors to hold fractional interests in property.
• The DomaCom Fund created a sub-fund which subsequently bought student accommodation units, which the SMSF had selected. These units were in Burwood Victoria.
• The DomaCom sub-fund paid $104,000 for the student accommodation, funded by its unit holders.
• The unit holders consisted of the trustee of the The Benson Family SMSF (‘the SMSF’), Mr Benson’s mother and brother.
• The custodian of the DomaCom Fund entered into a letting and management arrangement with Student Housing Australia Pty Ltd. who placed tenants into these units.
• The first two tenants were unrelated to Mr Benson. However, the third tenant was Mr Benson’s daughter, who was studying at the university.

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The Inhouse Asset Rule

A SMSF is restricted from having more than 5% of its total assets invested in in-house assets (s82 SISA). Aussiegolfa’s investments amounted to 7.83% of its assets [11]. The Commissioner deemed this non-compliance with the in-house asset rule.

Aussiegolfa Decision

The SMSF invested into a sub-fund, numbered DMC0114AU (“the Sub-Fund’) under a ‘widely held trust’ under s71(1)(h) SISA. The terms of the Sub-Fund allowed the funds of the trust to flow to the unitholders. These unitholders were related to Mr Benson the trustee of the SMSF. The court ruled that the Sub-Fund was its own trust. Further, that the Sub-Fund owned 100% of the income and capital of the fund, exceeding the 50% threshold required under s70E. This Sub-Fund invested in a school housing fund.

 “In-House Asset”

The term ‘in-house asset’ is defined under s71(1) SISA as:

‘an asset of the fund that is a loan to, or an investment in, a related party of the fund, an investment in a related trust of the fund, or an asset of the fund subject to a lease or lease arrangement between a trustee of the fund and a related party of the fund,’

70E Control Test

• In order for an entity to control a trust “a group in relation to the entity” has to have fixed entitlements to more than 50% of the capital or income of the trust.
• Further, the trustee of the trust is under an obligation (whether formal or informal), or might reasonably be expected, to act in accordance with the directions, instructions or wishes of a group in relation to the entity.
• Finally, the group has the ability to remove or appoint a trustee, or a majority of the trustees, of the trust.
• The Court deemed the Sub-Fund to be a related trust under s10(1) SISA because the group of associates in relation to the SMSF had a fixed entitlement to more than 50 of the income and capital of the SMSF.

SIS Reg 13.22C – Lease to Daughter

• The leasing arrangement with Ms Benson (Mr Benson’s daughter) caused the Benson Fund to breach the sole purpose test and the in-house asset rules under SIS Reg 13.22C.
• The units held by Aussiegolfa as trustee for the Benson Fund in DomaCom Sub-Fund is to be treated as an investment in a related trust of the Benson Fund.
• The Benson Fund had to comply with the sole purpose test in s62 of the SISA which the Commissioner contended had been breached by the leasing arrangement with Mr Benson’s daughter.

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The Sole Purpose Test

• SMSFs need to be maintained for the sole purpose of providing core purpose under section 62 SISA to its members (or to their dependants if a member dies before retirement). Trustees can face civil and criminal penalties for maintaining the fund for some other collateral purpose.
• The sole purpose test is a strict test requiring “exclusivity of purpose” [104 FR].

Core and Ancillary Purposes

Essentially, the sole purpose test focuses on whether, on the balance, it leads to an objective conclusion that the SMSF is being maintained for one of the core purposes specified in s62(1)(a) SISA.

The Commissioner contended that neither the core purposes nor the ancillary purposes include the provision of leased premises of an asset of a superannuation fund to a daughter of a member of a superannuation fund. [28]

The sole purpose test is an objective test.  That is, it is a matter of fact as to whether the grant of a lease to Ms Benson satisfies this test. An objective determination of the facts is necessary to answer the question as to whether the Benson Fund was maintained solely for the purposes contemplated by s62(1) or for the purpose of providing housing for Ms Benson. Pagone J confirmed that “the investment in units of the DomaCom Fund was for the collateral purpose of the superannuation fund being used to provide accommodation to a person related to the superannuation fund”.

The test requires more than a mere presence of a dominant or principal purpose in the maintenance of a superannuation fund, it requires an exclusivity of purpose commensurate with that purpose being the “sole purpose”. The Commissioner was satisfied that the purpose of the investment was to provide accommodation to Mr Benson’s daughter. This was confirmed by the Court in its decision.

Conclusion

Aussiegolfa involved a complex set of facts which confirmed that SMSF trustees should be careful in acquiring assets where a collateral purpose might appear which is contrary to the core or ancillary purpose. Further, that these assets may constitute in-house assets which are limited to 5% of a company’s total assets. More may come from this case, if appealed.

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GET IN TOUCH:

Adrian Wyper
Lawyer

adrian@petergell.com.au

[1] Aussiegolfa Pty Ltd (Trustee) v Commissioner of Taxation [2017] FCA 1525. (“Aussiegolfa”)