If you have been following the news concerning the SMSF sector recently, you’ll be aware the case of Aussiegolfa Pty Ltd v Commissioner of Taxation has been dominating the headlines. It stands to reason too as this legal action is likely to become a household name in the SMSF world with regard to the sole purpose test, much like Katz v Grossman is a landmark case in the estate planning arena.
The latest development has occurred just as this publication is going to print, and that is that the ATO has decided not to appeal the decision of the full Federal Court, which deemed Aussiegolfa, as trustee of the Benson Family Superannuation Fund, did not breach the sole purpose test just because the SMSF member’s daughter was renting a property the SMSF owned through a managed fund sub-trust.
And in my humble opinion, the regulator had no real choice but to take this action.
When the situation first appeared, the ATO used its discretionary power to rule Aussiegolfa had breached the sole purpose test – a decision later supported by the Federal Court.
Upon examining the facts of the case it would appear one item both regulator and Federal Court heavily relied on in taking their positions was an email from Mr Benson stating the lease of the property to his daughter was to test the related-party use of residential property.
However, the other facts of the case did not support any conclusion Mr Benson had the super fund acquire the property purely to provide accommodation for his daughter at the expense of all other considerations in running his SMSF. Some of these were that other tenants had lived in the dwelling before Ms Benson moved in and that a commercial amount of rent was being paid.
To summarise very simplistically, the full Federal Court decided the rest of the case facts outweighed any intent indicated by the email and as such held the sole purpose test had not been breached.
It may not regard it this way, seeing the heat of the battle has not quite cooled yet, but I think to a certain degree the ATO should perhaps feel it’s dodged a bullet.
I’ve always thought the regulator’s interaction with the SMSF community has been very well conducted and reasonable on the whole, often opting for an educative approach rather than one of heavy-handed compliance.
However, use of discretionary power can lead to poor perceptions as to its application, which in turn can result in fear and loathing in the SMSF community.
In the Aussiegolfa case the weight given to the email over other factual evidence seems a little disproportionate. Observers could suggest the appearance is the ATO interpreted the email as a gauntlet thrown down to it and as a result ruled against the SMSF because it just didn’t like the situation.
Unfortunately, some recent developments have not helped the ATO’s image among SMSFs either. Its stance on zero interest related-party loans is a case in point. There the regulator originally said it did not like these arrangements, warned against using them, but ostensibly agreed they were not in breach of the Superannuation Industry (Supervision) (SIS) Act.
This position later changed when application of the non-arm’s-length income rules as governed by the Income Tax Assessment Act, as opposed to the SIS Act, made these arrangements significantly less attractive.
Again it looked like the ATO wanted to stop these loans using any means possible simply because it didn’t like them.
I acknowledge the ATO has a tough job in regulating the sector and cannot compromise its integrity, but I’m sure fear and loathing are not what it wants in its interaction with SMSFs and not appealing the full Federal Court decision in the Aussiegolfa case will help avoid this outcome.