The case of Aussiegolfa Pty Ltd (Trustee) v Commissioner of Taxation has been a hot topic of discussion for close to 12 months now. There seem to be differing opinions in the industry on whether the recent findings handed down on the 10 August 2018 provide a point of clarity or not.
Here’s a quick snapshot of the facts of the case. Aussiegolfa Pty Ltd was the corporate trustee of the Benson Family Superannuation Fund. Mr Benson was the sole member of the fund. The SMSF invested along with other family members of Mr Benson in the managed investment scheme known as the DomaCom Fund, both in July and August 2015. The investment represented units in a sub-trust that owned a property in Burwood, Melbourne. This property was part of a structured investment strategy to invest in student accommodation. The custodian of DomaCom entered into a commercial leasing and managing agreement with Student Housing Australia Pty Ltd (SHA). For the first two years of the investment, the property was leased to two unrelated tenants. In February 2018, SHA agreed to lease the apartment to Mr Benson’s daughter based on a market rate of return.
This case revolved around the following issues: whether the investment in the sub-trust constituted an in-house asset, whether the fund breached the sole purpose test by leasing the investment to a related party and whether the ATO’s in-house asset discretionary power was constitutional.
The case has gone through a journey of appeals. It initially started with the ATO declaring the sub-trust was a related trust and hence the in-house asset rules applied. The fund’s investment in this sub-trust was over the 5 per cent limit. The tax office exercised its discretion under section 71(4)(b) of the Superannuation Industry (Supervision) (SIS) Act in making this declaration. It also found the sole purpose test was breached in relation to the leasing of the property to Mr Benson’s daughter. The trustees of the fund had an unsuccessful appeal to the commissioner of taxation and hence commenced an action in both the Federal Court and Administrative Appeals Tribunal (AAT).
In December 2017, the findings of the Federal Court agreed with the ATO’s position and the AAT overturned the tax office’s position under section 71(4)(b) of the SIS Act as it was found that it was not necessary as it was an in-house asset under the standard provisions. Aussiegolfa then appealed to the full Federal Court, while at the same time the ATO also appealed in the same court against the tribunal’s decision – a lawyer’s dream.
The findings of the full Federal Court
The first finding was in relation to the sole purpose test and while this core compliance test was challenged, the court ended up confirming what we have believed to date. It found there was a lack of purpose of providing accommodation to a relative at the time of the initial investment, “nor is there any reason to doubt that the investment was otherwise prudent and was well suited to the provision of membership beneﬁts in the future”. As the lease was at market value, there did not appear to be any “financial or other non-incidental benefit for either the daughter or her father”. The court concluded the fund “continued to be maintained for core and ancillary purposes, as deﬁned. It remained invested in a suitable property from which it continued to receive an appropriate return for the purposes of funding the provision of membership beneﬁts into the future”. It was further stated the personality of the tenant is irrelevant to the fund’s ability to meet the core and ancillary provisions of the sole purpose test.
The findings of this case are a positive and practical approach to the sole purpose test, especially in relation to the application of arm’s-length terms, the distinction between motive and purpose of the investment and the definition of ‘benefit’.
The impact moving forward for SMSFs
The findings of this case are a positive and practical approach to the sole purpose test, especially in relation to the application of arm’s-length terms, the distinction between motive and purpose of the investment and the definition of ‘benefit’. However, still be aware and don’t take this case as gospel. The sole purpose test is an objective test and the application is based on the merits of each case.
It is also important to note the full Federal Court still found the investment was an in-house asset due to the structure of the sub-trust and the wording of the supporting documentation. The full Federal Court also found the ATO’s power under section 71(4) of the SIS Act “appears to be unlimited and a provision cast in such terms, raises the possibility that it is an unconstitutional delegation of legislative power”. Another watch this space.