Kym Bailey, Technical Services Manager at JBWere, discusses the impact of Aussiegolfa Pty Ltd (Trustee) v Commissioner of Taxation [2018] FCAFC 122, now it has been revealed that the ATO has decided against filing a special leave application to the High Court of Australia.
The SPT origins pre-date modern super being designed to protect employees from ‘fund gouging’ by employers.It is always surprising to hear how commentators in and around SMSFs interpret the thrust of the sole purpose test (SPT) as per s62 SIS Act 1993. The cacophony of white noise following the Federal Court’s decision in Aussiegolfa Pty Ltd (Trustee) v COT [2018] FCAFC 122 on 10 August 2018 provides an indication that there may be a misunderstanding of the ‘purpose of the SPT’.
Now super is available to all, it seems that we may need protecting from ourselves, so remains relevant.
Section 62 in SISA could be described as the “Part IVA” of superannuation law – the ultimate catch-all provision to prevent abuses of tax concessions, by providing the spectre of a “non-compliance notice”.
A breach of the SPT generally comes after a series of breaches are identified and are of a magnitude that warrants pulling out the ‘big guns’. The ultimate penalty for a breach of the SPT is a non-compliance notice that removes the tax concessions available to a complying superfund. The fund earnings for the year of the non-compliance notice are taxed at the top marginal tax rate as are the fund assets – section 25 Income Tax Rates Act 1986
Given the consequences, a determination of a SPT breach is not likely to be utilised against the validity of a single transaction or, as many would suggest, a single strategy.
SISA has plenty of provisions dealing with the expected behaviour of SMSF trustees and, most of these are relatively easy to navigate and, even when breached, can often be rectified without the fund failing the SPT.
Aussiegolfa though was a test case – a deliberate action to validate a strategy to be taken to market. It’s no wonder the ATO pulled its big pants on and called a breach of the SPT.
The ATO decided not to appeal the Case, which perhaps is disappointing given that many in the industry are looking at this lower court decision as some new way to approach the interpretation of S62. The Tax Office has publically stated that it will issue a Decision Impact Statement and may review SMSFR 2008/2, so we need to see these before getting too creative.
As for DomaCom, they are busy restructuring their trust arrangements to get rid of the in-house asset issue. (A case of losing the battle, but winning the war?)
It is interesting when you review a case such as Hart and Commissioner of Taxation (Taxation) [2018] AATA 1267 – 15 May 2018, where no less than 6 compliance breaches occurred as a result of a single transaction. Once that was out of the way, the trustee continued on its path of destruction, ending up with a total of 14 breaches. By the time it got within the ATO line of sight, the fund had been cleaned out. There was no point in putting a breach of the SPT on top of all that preceded it, but the Tax Office did disqualify the main member from ever holding a trustee position.
This was a logical conclusion, as the trustee behaviour demonstrated in Hart was something that can’t be tolerated in an environment where significant tax concessions are afforded.
The Hart Case brings the purpose of the SPT into sharp focus – the spectre of a non-compliance notice and the associated significant tax penalties – should have be enough to prevent the array of compliance breaches that occurred. However, as the trustee had effectively gouged the fund, prior to being detected, a non-compliance notice would have served little purpose. [Removing the main offender from the super system is the right outcome however, it may also be appropriate for the ATO to follow-up with all the players involved with this fund over the years the breaches went undetected.]
In another case Deputy Commission of Taxation v Ryan [2015] FCA 1037, the facts included an Audit Contravention Report identifying a breach of s62. Under review, the trustees admitted to that breach, along with a serious of others, however the ATO was satisfied with disqualifying them from being a trustee and applied for the application of civil penalties. The breaches in this case were not dissimilar to the Hart case.
Ultimately the SPT acts as a “Damocles sword” for trustee behaviour. If anyone wants an example of its breach, the Hart and Ryan Cases have all the elements, not the Aussiegolfa case, where the main breach was the in-house asset provision as per s71 SISA. This provision is clearly defined, and easily assessed against the facts of the Case.
But where does this very topical Case leave us? I would suggest that, if a superfund trustee is able to avoid all SISA compliance breaches in their transactions, it is unlikely that a SPT breach will be possible. Where they trip up and breach a SISA provision(s), it will be an assessment of the trustee behaviour, the magnitude of the capital involved in the breach(s), the trustee’s ability to rectify, that will determine whether the sole purpose of the fund remains in accordance with section 62.
Fund documentation, including the Investment Strategy, which may be viewed as just a compliance document, will provide valuable evidence if a fund trustee finds themselves on the wrong side of SISA compliance. Complex investment transactions need to be evidenced by a sound document trail and the inclusion of purpose and intention, along with the regular review of ongoing appropriateness for the fund membership. Trustees need to think about the investment strategy, what are they aiming to achieve? This will help frame a strategy that will provide the pathway toward the provision of death, disability or retirement benefits for the fund members or their dependants.
Linking all these elements into fund management will help augment a trustee’s argument against a SPT breach, in the low likelihood that it is ever enlivened.
As the JBWere Technical Services Manager, Kym Bailey, provides support to JBWere Strategic Advisers across Australia. Her role includes analysing and developing technical solutions for client-facing Advisors, as well as providing technical capability training and development to the Adviser Teams, along with the curation of the client document library that is used by Advisors. Often acting as a coach and a sounding-board to Advisors, Kym enjoys distilling the complex into practical, sensible and appropriate solution for clients. Contact Kym at Kym.Bailey@jbwere.com. You can also connect with JBWere via LinkedIn.
