The case of Aussiegolfa Pty Ltd V Federal Commissioner of Taxation resulted in a landmark ruling regarding the sole purpose test and dominated discussions in SMSF circles during 2018. The director of the corporate trustee, Chris Benson, shares his perspective of the case with Darin Tyson-Chan, as well as his learnings from the outcome.
How long have you been involved in the SMSF sector?
My first exposure to SMSFs in any real sense was in the mid-1990s when I was the owner of a financial planning business where I had a few clients that had SMSFs. I sold that business back in 2000 and then worked for a number of groups involved in SMSFs, including CPA Australia where I was running its financial planning arm. During that time I had discussions with the SMSF Association chief executive, Andrea Slattery, about forming a strategic partnership between the two bodies, but that didn’t eventuate. I spent a few years at AMP where I mainly was involved in preventing leakage to SMSFs and then joined DomaCom in 2015.
You’re also the SMSF trustee behind the landmark Aussiegolfa court case that dominated industry discussions in 2018. What prompted you to embark on the strategy there?
When the fund was set up in 2010, I had a strategy of investing in the equity market, mainly in stocks offering franked dividends. The property acquisition came about shortly after joining DomaCom and after I’d had a discussion with my mother, who was bemoaning the fact that while she still had quite a few equities, her passive fixed interest investments were earning very low levels of return. At the same time I was examining the merits of investing in student accommodation and found these types of properties had a very high running yield. We couldn’t afford to buy one of these properties because the market had appreciated so we invested in a property in Burwood through the DomaCom structure. The property ended up being owned jointly by my SMSF and my mother and sister. While we did it to get some property exposure, it has been the standout performing asset of my super fund – it’s gone up considerably in capital value over that period of time and has continued to generate rental revenue with increases over time and has never been vacant. When we bought the property there was a tenant already in there and we had no intention of ever doing anything like what ultimately occurred until we started thinking internally that business real property had a sole purpose test exemption and residential property didn’t.
So how did it progress from there?
As I said, business real property was exempt and so too were widely held trusts, and DomaCom [set] up the managed fund originally, and we received legal input on this, so it would be seen to be a widely held trust. So DomaCom had gone to the ATO to get a ruling and there was a ruling provided quite some time ago that said it looks okay. Then the ATO had another look at it, had a change of heart, and said it’s actually not okay because we’re not actually seeing it as a widely held trust. That was probably the catalyst for us thinking we need to challenge the ATO in this regard. We wanted to have DomaCom recognised as a widely held trust in the way it holds property so we can qualify for that exemption. In turn, meeting that exemption will allow investors through an SMSF to buy units in one of the sub-funds owning a residential property and, as long as all of the appropriate conditions are met, could have a related-party apply to be the tenant. To be the tenant they would need to meet all of the normal criteria, including the fact that even if they owned a portion of the asset, they would still need to be paying the full market rent, and if they didn’t, like any tenant, they would be faced with eviction. On the structural side we saw having an independent trustee and custodian as being key elements of being seen as a widely held trust. The first court case effectively said the sub-funds were to be treated as separate trusts. We fundamentally believed, both in terms of DomaCom’s constitution and the product disclosure statement, that it is structured so it should be seen as a widely held trust with each of the sub-funds being different classes of units within that widely held trust.
Why did you feel the need to test the legislation with a real situation involving your family members?
Before we got to the original court case we sought legal advice as to how we could best test the legislation out. The lawyers and barristers we were working with categorically said we would have a much better chance of proving our point if we have a real case to contest and not merely a hypothetical case. That’s because in this situation the court would have to make a very clear decision. So as one of the few DomaCom employees who ran an SMSF, had units in a DomaCom property and the opportunity to have a related party potentially take up a future tenancy in the property, I said I was happy to participate. I certainly went into the situation with my eyes open. I’ve had a very long exposure and experience in financial services and the SMSF space so I was aware of what the ramifications might be. Notwithstanding that, I fundamentally believe this was a situation that was worth fighting for.
Did the ATO justify its revised position?
I think in retrospect the ATO may have seen it as giving DomaCom permission to go out and promote a property scheme to effectively do this. It probably didn’t want see that type of promotion overtly being done in the industry. On a stand-alone basis there was no reduction in capital value of my fund, there was no reduction in the income of my fund, there was no reduction in tax payable to the ATO, but it just didn’t meet its strict criteria.
Did the fact you work for DomaCom have an influence on the original court decision?
I would hope that it didn’t, especially seeing when the initial decision was made the ATO came to the DomaCom offices where they received a full presentation with lawyers present and I wasn’t involved with that at any stage. And this was well before the Aussiegolfa fund was involved, so it had nothing to do with me. It was only once the court case came around and we had a real case to fight that I really got involved. I don’t think my employment status had a real bearing in the original judgment. When both sides made discovery, both sides had to release all of the documents, including internal memorandums and emails, and in one email I had communicated to the head of client service that we wanted to test out some of the provisions of the system, namely the sole purpose test. The court did tend to make a fair bit out of that internal email between myself and another person in the organisation. I think the judge’s initial decision was somehow coloured with that because it was mentioned in the appeal and the appeal judges dismissed it.
At the conclusion of the first court case, how did you feel?
I came out of the initial court case relatively positive, but not thinking we’ve got this won. We thought we put some very good arguments forward, we thought some of the ATO arguments weren’t particularly strong, but notwithstanding that the judge made the decision that he made, which was ultimately overturned on appeal with the three judges.
Were you always going to appeal the initial decision?
In a very short space of time we confirmed we were going to appeal. We had a period of time when we could say we were going to appeal and subsequent to that decision had quite a few months where we could prepare for that appeal, and if we decided at any point we didn’t want to continue to go down that path, we could have withdrawn it. But if we didn’t take up the opportunity to appeal initially, I don’t think you can go back after the event and say we want to appeal the decision now. So we were always going to take up the opportunity to appeal.
The full Federal Court on appeal ruled the arrangement did not breach the sole purpose test, but that the property is an in-house asset. Which aspect is more significant?
The sole purpose decision was very important. It basically means now that so long as you can clearly demonstrate you bought a residential property for the purpose of being an asset to fund your retirement benefits, then it’s merely incidental that there may be a related party as a resident as long as they are paying the full rent and there is no dilution of fund benefits and no dilution of tax liabilities and the like. The in-house asset ruling is an issue insofar as it restricts people to only have 5 per cent of their super fund in these types of assets. One of the things we’ve learned is essentially once an asset has been deemed to be an in-house asset, it always holds that status. So it wasn’t merely a case where the asset ceases to be an in-house asset once my daughter is no longer a tenant in the property; the creation of the initial lease permanently tainted that asset. As such I now have to sell down a portion of that asset to bring it under the 5 per cent threshold.
This has been a protracted process, and knowing what you know now, would you do it again?
I would say yes because I’ve got a fundamental belief in having to take a stand sometimes if something is not right in the law to correct it. I see there is no fundamental reason why, given the correct mechanisms, that a residential property can’t be held within an SMSF and have a related party to the owners of an SMSF take up a tenancy in that property.