Tracey Scotchbrook, SMSF Specialist Advisor, discusses the recent Federal Court of Australia Full Court decision of Aussiegolfa Pty Ltd (Trustee) v Commissioner of Taxation which surprised with its decision on the SMSF sole purpose test.
Case puts spotlight on sole purpose test
The case of Aussiegolfa Pty Ltd (Trustee) v Commissioner of Taxation was widely reported when the decision in the first case was handed down in December 2017. The case revolved around the in-house asset rules, the definition of a widely held trust, use of residential property by a member or a related party and the sole purpose test. That decision on the sole purpose test came as quite a surprise.
The much anticipated judgement on appeal was handed down on the 10 August 2018.
Mr Benson was the sole member of the SMSF the trustee of which was Aussiegolfa Pty Ltd. He was also DomaCom’s Victorian State Manager. DomaCom manages the DomaCom Fund, a managed investment scheme providing investors the opportunity to invest in property.
Mr Benson’s SMSF, his sister’s SMSF and Mother invested in a sub-trust in DomaCom with a view 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 ATO’s position was that a breach of both the in-house asset rules and sole purpose test had occurred.
Sole Purpose Test
The original case found that a breach of the sole purpose test had occurred as “by the fact that a purpose of Aussiegolfa in acquiring the units in the DomaCom Fund was to provide accommodation to a relative of Mr Benson.”
This decision appeared to hinge upon a comment in an email from Mr Benson to DomaCom “that Mr Benson and some family members were using the Burwood property to test ‘the related party use of residential property within’ self-managed superannuation funds.”
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.
The definition of the sole purpose test in SISA s.62 requires that a fund is maintained solely for:
a) one or more prescribed core purposes;
- Provision of retirement benefits; or
- Provision of benefits to members age 65 and over; or
- Payment of death benefits (member pre-retirement); or
b) one or more prescribed ancillary purposes
- Provision of benefits on cessation of work due to ill health; or
- Payment of death benefits (member post retirement or age 65 or over)
ATO ruling SMSFR 2008/2 on the sole purpose test states:
128. …The mere fact that a related party enjoys the use of an SMSF asset does not by itself establish a breach of sole purpose test.
12. Factors that would weigh in favour of a conclusion that an SMSF is not being maintained in accordance with section 62… include:
- The trustee negotiated or sought out the benefit
- The benefit has influenced the decision-making of the trustee to favour one course of action over another
- The benefit is provided by the SMSF to a member or another party at a cost or financial detriment to the SMSF
- There is a pattern or preponderance of events that, when viewed in their entirety, amount to a material benefit being provided that is not specified under subsection 62(1)
The Judges upheld the original findings in relation to in-house assets and widely held trusts. However, the original decision on the sole purpose test was overturned. A summary of components of the decision are listed below:
- No apparent plan on acquisition to lease the property to a related party. The decision to invest 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 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
- Email by Mr Benson to the Fund Manager of DomaCom was an internal email and appeared to be in his capacity as an employee of DomaCom and not that as trustee of the SMSF
The importance of this appeal is the objective and detailed examination of the facts for the application of the sole purpose test. The original case seemed to place a heavy weighting on Mr Benson’s email and therefore had the potential to broaden the application of the sole purpose test. The appeal decision breaks down the facts and events, applying these objectively with detailed consideration of the sole purpose test. A common sense outcome.
To read the judgements go to:
Tracey Scotchbrook is a SMSF Specialist Advisor™ and consultant 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 email@example.com You can also connect with Tracey via Twitter