On 10 August the full Federal Court handed down its judgement for Aussiegolfa Pty Ltd (Trustee) v Commissioner of Taxation  FCAFC 122.
This case may have significant implications for the sole purpose test under s 62 of the Superannuation Industry (Supervision) Act 1993 (SIS Act), which requires a trustee of a regulated superannuation fund to maintain it solely for the purpose of providing retirement benefits to its members.
The Court found that the leasing of a residential property owned by a father’s self managed superannuation fund (SMSF) to his daughter did not breach the sole purpose test (although the SMSF did breach the in-house asset rules).
Mr Benson is the sole member of the Benson Family Superannuation Fund (the Fund), of which Aussiegolfa Pty Ltd is the trustee (Aussiegolfa).
Aussiegolfa, Mr Benson’s mother and a superannuation fund of Mr Benson’s sister and her partner (the Related Parties) invested in the DomaCom Fund. This involved the purchase of a student accommodation property in Burwood (the Burwood Property), which was the sole asset of a sub-fund of the Domacom Fund. Aussiegolfa and the Related Parties were the sole unit holders of this sub-fund. Aussiegolfa invested approx. 8% of its assets in the DomaCom Fund.
In April 2017, and after two previous tenants had rented the Burwood Property, it was then leased to Mr Benson’s daughter at market rent.
The ATO declared, among other things, that the Fund breached the sole purpose test because the Burwood Property had been leased to Mr Benson’s daughter. This was confirmed by the Federal Court last year.
Aussiegolfa then appealed this decision to the full Federal Court.
On appeal, the full Federal Court held that leasing the Burwood Property to Mr Benson’s daughter was not a breach of the sole purpose test.
In coming to this decision, the Court placed emphasis on the way in which the Fund was objectively maintained, rather than subjective factors or whether the Fund was dealing with related parties.
A determinative factor was that the Burwood Property was leased to Ms Benson at market rent. Due to this, any non-financial benefit or current day benefit of comfort, convenience or accommodation derived from the arrangement was incidental or not relevant.
Additionally, the Court took into consideration the fact that two non-related parties had leased the Burwood Property prior to Ms Benson.
However, the Court cautioned it would have “probably” come to a different conclusion if the lease was not at market rent or if the investment policy of the SMSF had been affected by the leasing of the property to Ms Benson.
Further, the Court held that the investment was an investment in an in-house asset (i.e. an investment with the Related Parties directly into the sub-fund of DomaCom) and confirmed that the ATO had the power to deem the investment to be an in-house asset under the in-house asset anti-avoidance provision in section 71(4) of the SIS Act.
This decision is significant for trustees of superannuation funds regarding how they invest and the use of SMSF assets.
In the past, the ATO and SMSF auditors have taken a broad view of the sole purpose tests so as not to allow related party use of SMSF owned residential property. The full Federal Court’s ruling indicates that in certain circumstances (including where there are arm’s length terms) there is scope for related party use without triggering a breach of the sole purpose test.
If you or your clients are contemplating an SMSF investment and require assistance please contact Thalia Dardamanis. Any permissible related party use of SMSF assets is highly circumstantial and requires appropriate consideration and advice.