Tracey Scotchbrook, SMSF Specialist Advisor and Director of Superology, recaps Aussiegolfa Pty Ltd (Trustee) v Federal Commissioner of Taxation and discusses the ATO’s Decision Impact Statement on the case, which is open for comment until 11 January 2019.
The 2018 year has been a busy one with a number of pivotal SMSF cases decided through the courts. The decision from the appeal in the case of Aussiegolfa Pty Ltd (Trustee) v Commissioner of Taxation  FCAFC 122 on the application of the sole purpose test in August 2018 was much anticipated.
Since this decision, the Australian Taxation Office has held concerns that the incorrect interpretation of this case has seen some view this case as a green light for SMSFs looking to rent residential property to a related party. In response the ATO has now issued its Decision Impact Statement on Aussiegolfa.
The Aussiegolfa case examined the application of the in-house assets rules and sole purpose test. The SMSF in this case had invested in a sub-trust that invested in residential property that was leased to a related party.
“The product provider DomaCom is a registered managed investment scheme which facilitates fractional property investment. Each property acquired by DomaCom is held in a separate class of units, known as a sub-fund.”
Mr Benson, an employee of DomaCom, invested in the sub trust via his SMSF along with two other related parties. The intention was for the sub-trust to purchase an apartment in a student accommodation complex. The student housing was managed by an agent with the first two tenants being arms length, unrelated parties to Mr Benson or his SMSF. Mr Benson’s daughter became the third tenant after applying through the managing agent. The agent acted on behalf of the custodian of the DomaCom Fund.
The monthly rental rates paid by Ms Benson were the same the first two tenants.
The original 2017 case found there was a breach of the sole purpose test. However on appeal in 2018 this was overturned.
Key Points in Appeal Decision
On appeal one the questions to be tested was whether leasing the apartment to the daughter of the sole member of the self-managed superannuation fund at market rent would cause the fund to breach the sole purpose test.
In addressing this question more than one factor was considered by the court, not just whether the rental rate was at market. The decision noted:
- No apparent plan on acquisition to lease the property to a related party. The decision to invest in the property was made in 2015 where as the decision to lease to the daughter was not made until 2017
- Nothing to suggest the daughter was an unsuitable tenant. The Custodian through the use of an agent made the decision to lease to the daughter, not the SMSF trustee
- No ‘benefits’ were conferred upon the daughter
- Continued payment of market rent did not diminish or threaten the SMSFs ability to provide superannuation benefits to its members. It continued to receive the same return from its investment
- There is no reason to doubt that the investment was otherwise prudent and was well suited to the provision of membership benefits in the future
- The personality of the tenant is irrelevant to the Fund’s ability to meet its core and ancillary purposes as defined by SISA s.62
The Australian Taxation Office has now issued its Decision Impact Statement in response to this case. The statement addresses both the in-house assets and sole purpose test aspects of the case.
With regards to the sole purpose test, the ATO has stated that they “…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.”
On consideration of the specific facts that apply in this case the ATO has stated that “an important aspect of the factual arrangement was that:
- the 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
- the daughter paid equivalent market rent to that paid by the two previous tenants, and
- there was no suggestion that the leasing of the property to the daughter influenced the SMSFs investment policy.
The ATO further stated that:
It is the purpose of making and maintaining a fund’s investments that is central to identifying if there is a contravention of the sole purpose test. We note the observations of the court that a collateral purpose, and a contravention of section 62 of the SISA, could well be present if, for example, the circumstances indicated that leasing to a related party had influenced the fund’s investment policy. [emphasis added]
The ATO ruling on the application of the sole purpose test SMSFR 2008/2 states that determining whether a SMSF satisfies the sole purpose test would be “objectively discerned from the facts and circumstances” and take into account “intention and purpose” of the trustees. Are benefits inconsistent with the sole purpose test being provided? Are the parties dealing at arm’s length?
Paragraph 128 states that “the mere fact that a related party enjoys the use of an SMSF asset does not by itself establish a breach of the sole purpose test. However, in some cases the benefits conferred by an SMSF’s activities in relation to in-house assets cannot be seen as merely incidental to the provision of the benefits permitted by section 62″ [emphasis added]
This case has demonstrated that although the in-house asset rules were breached, based on the facts and circumstances present, the sole purpose test was not. However the ATO’s decision impact statement stands as an important reminder that multiple factors need be carefully considered when applying the sole purpose test. Particularly where related parties and in-house assets are involved.
Open for Comment
As the ATO undertake a review of their public advice and guidance on the sole purpose test, comments have been invited in response to the decision impact statement. The closing date for comments is the 11 January 2019.
To read the ATO’s Decision Impact Statement in full go to https://www.ato.gov.au/law/view/document?docid=LIT/ICD/VID54of2018/00001
Tracey Scotchbrook is a SMSF Specialist Advisor and Director of Superology Pty Ltd with 15 years’ experience. Early in her accounting career Tracey had the opportunity to work with self-managed superannuation funds, setting her on the pathway to specialisation. She is actively involved in the SMSF Association (“SMSFA”) and is the former WA Chapter Chair and National Membership Committee Member. Her accreditations include: SMSF Specialist Advisor (SSA) with the SMSF Association, CA and CPA SMSF Specialist, and Charted Tax Advisor with the Tax Institute. Tracey is a regular presenter to industry professionals and trustees, commentator, educator, and writer. In 2009 Tracey was awarded the Praemium Scholarship by the SMSFA. Contact Tracey at firstname.lastname@example.org