The Full Federal Court has ruled that a Self Managed Superannuation Fund’s (SMSF‘s) investment in a property trust, which was set up so as to perform, in line with a nominated single property:
- did not breach the sole purpose test under s 62 of the SIS Act (despite the property being leased to the daughter of the SMSF member).
- But did breach the 5% in-house assets’ investment cap, in s82 of the SIS Act.
On 10 October 2018, we learned that the ATO is not going to seek leave to appeal this decision to the High Court. (See related Tax Technical Article.)
The Facts were these.
- The relevant SMSF had a Mr Benson as the member.
- The SMSF had invested in units in the DomaCom Fund (for which Mr Bowen worked, and this was a test case for DomaCom).
- The DomaCom structure allowed an SMSF to nominate a property, which it, as a ‘widely held’ trust, would acquire. The property would be held in what the documents called a ‘sub-fund’ and the units issued, had rights limited to the economic performance of the asset in that sub-fund. It offered the opportunity to invest in a property through a ‘widely held’ trust.
- It was thought that this might allow parties ‘related’, to the SMSF member, to rent the property and and that it might also allow parties ‘related’ parties to the SMSF member, to acquire fractional interests in the property, without breaching the ‘in-house assets rule’.
- In line with these arrangements, the DomaCom trustee bought a student accommodation unit in Burwood (Victoria), which the unit holders had nominated and funded (forming the ‘Burwood Sub-Fund‘). The SMSF trustee (AussieGolfa) was one of those unit holders, as were Mr Benson’s mother and his sister’s SMSF, holding 25%, 50% and 25%, respectively.
- The DomaCom trustee then leased the Burwood unit to a student housing authority which, in turn, rented the property to students. The Authority leased the Burwood unit to 2 other students (at market rent) before leasing it to Mr Benson’s daughter (also at market rent).
At first instance, the Federal Court found that the investment breached the sole purpose test as it was for the collateral purpose of providing housing for a relative, which was not a permitted core or ancillary purpose. It also found that the Burwood Sub-Fund was the relevant ‘trust’ for ‘in-house assets’ purposes, so the SMSF’s units, in the Burwood Sub-Fund, were an investment in an ‘in-house asset’ (and, at 7.83% of the value of the SMSF’s investments, those units breached the 5% on cap). [See the Tax Technical Article on this first instance decision.]
The Full Federal Court:
- allowed the appeal on the ‘sole purpose’ point; and
- disallowed the appeal on the ‘in-house assets’ point.
On the ‘sole purpose’ point – the Full Federal Court said s62 does not say that a fund will fail the requirement, to be maintained solely for the core purposes (and ancillary purposes), simply because the trustee enters into a transaction with a related party. As the underlying property, in this case, was leased to the daughter, at market rent, the Full Court considered that there was no offending financial benefit, to either the fund member or his daughter (which was what the ‘core’ and ‘ancillary’ purposes were aimed at). To the extent that there was some benefit, the Full Court regarded it as a merely “incidental”. However, the Full Court warned that if the lease was not at market rent, an inference would readily be drawn that the fund was being maintained for a collateral purpose contrary to the sole purpose test.
The Full Court’s reasons, on this point are more fully analysed in the related Tax Technical Article, written by DBA Lawyers.
On the ‘in-house assets’ point, the SMSF lost. The Full Court also found that the ‘sub-fund’ was relevantly a ‘trust’ for the purposes of the 5% cap on investing in ‘in-house’ assets. It mattered not, that the Burwood Units were also held in ‘widely held’ umbrella fund. Identifying the Burwood Sub-Fund as a ‘trust’ also, meant that there was a ‘related trust’ that the SMSF had invested in (so the 5% cap applied).
The critical issue, was, as noted, whether the Burwood Sub-fund was relevantly a ‘trust’ in its own right (rather than something less than that, and was only part of another trust: DomaCom). The ‘in-house asset’ issue hung on this because of the following chain of definitions.
- Under s71(1), an ‘in-house asset‘ includes “an investment in a related trust” that is not a “widely held unit trust” (under s71(1)).
- a ‘related trust’ of the Benson SMSF is a ‘trust’ that “a member [of the SMSF: Mr Benson] … controls” (s10).
- ‘control of a trust’ is defined as a ‘group’ having “a fixed entitlement to more than 50% of the capital or income of the trust (in s70E(2(a)) and ‘fixed entitlement’ doesn’t appear to be defined.
- ‘group’ is defined as an ‘entity’ [viz: Mr Benson as the fund member], or his ‘Part 8 Associates’, or both (s70E(3)).
- ‘Part 8 Associates’, of Mr Benson, includes ‘relatives’ (s70B(a)).
- ‘relative’ includes: ‘parent’ (viz: his mother) and ‘lineal descendant’ (viz: his ‘sister’). His mother holds 50% of the Burwood Sub-Fund, but ‘control’ is more than 50%. To get past 50%, the 25% held by one or both of, Mr Bensons SMSF, or his Sister’s SMSF, have to be part of the ‘group’.
- ‘Part 8 Associates’ could include also an SMSF, where another member of a ‘group’ “controls the trust” (s70B(e)). Mr Benson or his sister will relevantly control their SMSF, if its trustee “[amongst other things] might reasonably be expected, to act in accordance with [his/her] directions, instructions or wishes” (s70E(2)(b)) or he/she is “able to remove or appoint the trustee, or a majority of the trustees, of the trust” (s70E(2)(c)).
The Court held that there was a ‘group’, comprising: Mr Benson, his mother and his sister’s SMS, and that group did relevantly ‘control’ the Burwood Sub-Fund, but it seems this was only because the trustee of Mr Bensons’s SMSF (Aussiegolfa) conceded it. Justice Moshinsky said [at para 103]
It is accepted that the Benson Fund, together with Mr Benson’s mother and the superannuation fund of Mr Benson’s sister and her husband, had a fixed entitlement to 100 per cent of the distributable income and capital of the Burwood Sub-Fund (Aussiegolfa’s outline of submissions in the Federal Court Appeal, ).
The Full Court held that the Burwood Sub-Fund was a separate ‘trust’, for these purposes [para 151, 153 & 156], for reasons that included the following.
- The word ‘trust’ was not defined, so the Court looked at various definitions of ‘trust’. A workable workable summary, of its findings, might be: the whole of the relationship, in equity, between the owner of property, the subject of a trust, and beneficiaries of that trust.
- The DomaCom constitution provided for the creation of different classes of units, for each nominated property, such that the holders of those units would be entitled to all money to flow from that property and would bear all expenses from that property [para 145(d)].
- To support those rights, the DomaCom trustee’s right of indemnity, was limited so that it could not use the assets, of one sub-fund, to pay the expenses of another sub-fund [para 150].
- The DomaCom trustee could not create a class of units, unless the assets of one class were not encumbered with the liabilities of another class [para 91, clause 4.4 of the 2017 Constitution, para (c)(iii)].
- Many of the provisions, in the 2015 Constitution (as updated in 2017) talked of there only being one (big) fund, but these provisions were expressed to be subject to the rights of classes of units created (and it was those rights that created separate sub-trusts) [para 154].
The ‘widely held unit trust’ issue – turned on the same issue, namely, whether the relevant ‘trust’ was the Burwood Sub-Fund. Plainly, a closely held Sub-Fund could not be a widely held unit trust, and the parties accepted this. [para 157]
(Aussiegolfa Pty Ltd (Trustee) v CofT  FCAFC 122, Full Federal Court, Besanko, Moshinsky and Steward JJ, 10 August 2018.)
[LTN 154, 13/8/18; Tax Month – August 2018]
Comprehension questions (answers available)
- Did the arrangement involve a widely held fund (DomaCom), which could issue classes of units, that limited the investment to a particular property, nominated by that class unit holders?
- In this case, was a class of units issued, that related to a student accommodation unit, in Burwood?
- Were the holders of this Burwood class of unit holders: Mr Benson’s SMSF, his mother and his sister’s SMSF?
- Did the DomaCom trustee lease the Burwood Unit to an Authority, that eventually on-leased it to Mr Benson’s daughter?
- Did leasing the Unit to Mr Benson’s daughter, result in Mr Benson’s SMSF breaching the ‘sole purpose test’?
- Were the Burwood Units, units issued by the trustee of a ‘widely held unit trust’?
- Did this preclude the Units being ‘in-house assets’?
- Did it matter whether the Burwood Sub-Fund was a ‘trust’ in its own right (albeit part of a bigger umbrella trust)?
- Did the Full Court find that the Sub-Fund was a ‘trust’?