The Federal Court has ruled that an investment of Mr Benson’s self-managed superannuation fund (SMSF) in a property sub-trust, breached the sole purpose test and in-house asset rules under ss 62 and 82 of SIS Act (respectively). This was because, amongst other things, the ultimate investment was a student apartment, occupied by Mr Benson’s daughter. This underlying substance of the arrangement was exposed despite the sub-trust being part of a trust offered to the public (and, in that sense, ‘widely held’).
The facts are these.
- In March 2015, the SMSF invested $28,080 in units in the DomaCom Fund, being a managed investment scheme that enables investors to hold fractional interests in property.
- The DomaCom Fund, established a sub-fund, that acquired a student accommodation unit, in Burwood, Victoria, which the SMSF trustee had selected.
- The sub-fund ultimately paid $104,000 for the student unit, funded by unit holders subscribing for units in the sub-fund. The unit holders were the DomaCom trustee on behalf of the SMSF (25%); Mr Benson’s mother (50%) and Mr Benson’s brother (25%).
- The custodian of the DomaCom Fund entered into a letting and management agreement with Student Housing Australia Pty Ltd (Student Housing).
- The first two tenants, that Student Housing found, for the DomaCom sub-fund property, were unrelated to Mr Benson.
- However, the third tenant was Mr Benson’s daughter, who was studying at the nearby university.
The Commissioner’s contentions
The Commissioner considered that the leasing arrangement with the daughter breached the sole purpose test, and SMSF’s investment in the sub-fund breached the ‘in-house assets test’ as the sub-fund was a ‘related trust’ and thus, the SMSF’s investment in 25% of the sub-fund was an ‘in-house asset’, which also exceeded the permitted 5% of the SMSF’s funds.
The SMSF’s contentions
The SMSF’s contentions were, in essence, that the daughter paid an arm’s length rent and the investment performed like any other.
The SMSF trustee contended that the investment in the DomaCom Fund (rather than the Burwood property sub-fund) did not breach the 5% limit for in-house assets, and it was an exempt “widely held unit trust”.
Mr Benson was, in fact, the Victorian manager for DomaCom, and his was a test case, for the efficacy of the DomaCom sub-fund structure and also for leasing to parties related to the SMSF member(s).
The sole purpose test
Section 62 of the SIS Act provides: “Each trustee of a regulated superannuation fund must ensure that the fund is maintained solely: (a) for one or more of the following purposes … : (i) the provision of [superannuation] benefits for each member of the fund…“. A ‘sole’ purpose test, sets a very high threshold.
In dismissing the SMSF’s application for declaratory relief, the Court ruled that the investment in the units breached the sole purpose test as the investment was for the collateral purpose of providing housing for a relative. While there may be circumstances in which a lease to a related-party would not breach the sole purpose test, the Court said that, the evidence in this case was, that the purpose of the SMSF investment, in student accommodation, through the DomaCom Fund was, in part, to provide housing for the member’s daughter.
Ultimately, it did not assist that the sub-fund was part of a much larger fund; that the leasing was through a dedicated student agency, which also managed the accommodation units; that the first two occupants were unrelated; or that the daughter paid an arm’s length rent, making it perform properly as an investment.
In-house Assets Test
Section 82(2) of the SIS Act prohibits ‘regulated superannuation funds’ having more than 5% of the value of their investments in ‘in-house assets’ as defined. The ‘basic’ definition of ‘in-house asset’, is in s71(1) of SIS, which provides:
71(1) For the purposes of this Part, an in-house asset of a superannuation fund is an asset of the fund that is a loan to, or an investment in, a related party of the fund, an investment in a related trust of the fund, or an asset of the fund subject to a lease or lease arrangement between a trustee of the fund and a related party of the fund, but does not include: …
(h) an investment in a widely held unit trust; or …
The question of compliance, with the ‘in-house asset’ rule, turned on whether the sub-fund was the relevant trust, as Mr Benson was a member of the relevant SMSF, his relatives: his mother and brother (even alone) had relevant control, by virtue of holding more than 50% of the units in the sub-fund.
The relevant (‘simple’) chain of definitions is as follows:
- a ‘related trust’ one that “a member [of the SMSF: Mr Benson] … controls” (s10).
- ‘control of a trust’ is defined as a ‘group’ with more than 50% of the capital or income of the trust (in s70E(2)).
- ‘group’ is defined as an ‘entity’ [the fund member] or the entity’s ‘Part 8 Associates’ or both (s70E(3)).
- ‘Part 8 Associates’, of Mr Benson, includes ‘relatives’ (s70B(a)).
- ‘relative’ includes ‘parent’ (viz: his mother) and his ‘brother’ (s10).
The Court ruled that the SMSF had breached the in-house asset rule, as the relevant investment was the units in the Burwood property sub-fund. It was thus thus a “related trust” and was not a ‘widely held unit trust’.
Notwithstanding that aspects of the Constitution and product disclosure statements, as amended, attempted to maintain that the Burwood property was held on trust for the entire DomaCom Fund, the Court found that the documentation viewed in its entirety created a separate trust for each sub-fund. Accordingly, the Court ruled that the investment in the Burwood property sub-fund breached the 5% limit for in-house assets.
Given this is a test case, there may be an appeal.
(Aussiegolfa Pty Ltd (Trustee) v FCT  FCA 1525, Federal Court, Pagone J, 14 December 2017.)
[FJM; LTN 6, 10/1/18; Tax Month January 2018]
- Is the ‘sole purpose test’ is in s62 of the SIS Act?
- Is it 6% of the market value of ‘in house assets’ that is permitted?
- Did the ‘sub-trust’ arrangement work, for ‘in-house asset’ purposes?
- Did it matter, for the sole purpose test, that the tenant was related to Mr Benson?
- Was this a 2018 case?