The ATO’s decision not to seek special leave to appeal the full Federal Court decision in Aussiegolfa Pty Ltd (Trustee) v Commissioner of Taxation in respect of the sole purpose test should not offer SMSFs comfort in thinking they can lease residential property to related parties, a financial planner has warned.
Verante Financial Planning director Liam Shorte told selfmanagedsuper SMSF members would have to breach just one of the arm’s-length rules or commercial terms when renting a residential property to a related party to be in breach of the sole purpose test.
“It’s not something that I would let any of my clients do and it’s not something accountants giving advice should advise somebody to think about it,” Shorte said.
“I think this case has deliberately pushed to try and stretch the boundary and they got away with it on the sole purpose test. They won’t get away with it on the in-house asset side of it.”
The ATO yesterday announced it had informed Aussiegolfa, which is the trustee of the Benson Family Super Fund (BFSF), the tax commissioner will not be seeking special leave to appeal the full Federal Court’s decision.
It came after fractional property investment house DomaCom had the full Federal Court hand down a favourable decision with regard to the leasing to a related party of a property held in a sub-fund where an SMSF is the owner of units in the sub-fund.
That decision followed Aussiegolfa appealing an earlier Federal Court ruling that deemed the fund had breached the sole purpose test because it had leased a property partly owned by the SMSF via a sub-fund of a managed fund to the daughter of the SMSF trustee’s sole director, Mr Benson. The intent of this arrangement was deemed to be to provide accommodation for Ms Benson as opposed to be providing for investment returns to the super fund.
The ATO noted the full Federal Court stressed its decision with respect to the sole purpose test was dependent on the factual arrangement being considered in this particular case and different circumstances could have led to a different outcome.
The tax office also pointed out the “arrangement was still found to be in contravention of the in-house asset test and therefore ineffective from a regulatory perspective”.
Shorte warned the parameters for real business property are different as the legislation allows for a clear exemption for that.
He said the ATO monitors SMSF residential property dealings more closely, adding there is more scope for errors. “With business real property you’re involving different entities, reporting annually, you’ve got your financials for your company and your financials for the super fund, so most things are done above aboard,” he said.
“With residential property there’s too much leeway to start manipulating rules. I’d just say it’s just not something you would consider.”
In addition, he said residential property dealings are immediately flagged to the ATO, which will catch the attention of auditors who will be looking out for it, and so it will be clamped down on quickly.
While it was not possible with the Aussiegolfa case, he said he hoped at some stage someone will carry out a test case to try and reaffirm the exact parameters of a breach of the sole purpose test.
DomaCom said the Australian Government Solicitor had advised the firm’s lawyers of the tax office’s decision not to apply for special leave to appeal the decision.
Chief executive Arthur Naoumidis said: “This is a milestone in our efforts to allow our own superannuation to help us address the housing affordability crisis affecting many Australians.
“DomaCom will now focus on addressing the remaining related-trust issues identified by the full Federal Court by reviewing our constitution and disclosure documents to address these items with respect to future sub-funds.”