On Monday 3.12.18, the ATO issued a Decision Impact Statement (DIS) on the Full Federal Court’s decision in Aussiegolfa Pty Ltd (Trustee) v FCT  FCAFC 122.
Aussiegolfa was the trustee of an SMSF, that invested in a publicly offered managed investment scheme: the DomaCom Fund. This ‘Master Trust’ provided for classes of unit holder, which allowed the holders to specify a property, for the trustee of the Master Trust to invest in, where the holders in that class of units would enjoy the benefits of owning that particular property, in proportion to the units they held (in that class of units). The Master Trust, was conceived to, amongst other things:
- allow the nominated property to be rented to a non-arm’s length party, without breaching the sole purpose test, or the arm’s length dealing rules (provided it was rented at arm’s length). The involvement of an ‘arm’s length’ party was thought to assist in this.
- allow the SMSF to acquire fractional interests in particular properties, with related parties without breaching the 5% ‘in-house asset’ restrictions (in s82 of the SIS Act), by establishing the Master Trust as a ‘investment in a widely held unit trust’. An investment in such a widely held trust, is outside the definition of ‘in-house asset’ (under s71(1)(h) of the SIS Act).
The property nominated, by SMSF and the other unit holders (in this class), was student accommodation near Deakin University in Burwood, Victoria. Leasing of such properties was carried out through an arm’s length leasing agency. It was under these arrangements that the property was first leased to two arm’s length students, before being leased to the daughter of the SMSF beneficiary, importantly, at the same rent.
Incidentally, the SMSF member was an executive of DomaCom, running this as a test case for the effectiveness of the DomaCom structure.
Full Court held in favour of the self-managed super fund (SMSF) – that it’s investment in the Master Trust (even though it was in a class of units relating to the property leased to the daughter), did not breach the sole purpose test under s 62 of the SIS Act). The fact that the property was plainly leased at an arm’s length rent, was enough. The fact that there was a familial link, to the tenant, did not matter (for ‘sole purpose’ test purposes).
The Full Court still ruled against the SMSF trustee by finding that the investment was an in-house asset, and in breach of the 5% limit. It considered that the relevant ‘fund’ (for the purpose of the definition of ‘related party’ in s10 of the SIS Act) was the Sub-Trust, and this allowed the relevant percentages to be breached by the other parties who held shares of that case and were related to the SMSF beneficiary.
The ATO warned that the case should not be read as authority for the proposition that a SMSF trustee can never contravene the sole purpose test when leasing an asset to a related party simply because market-value rent is received. Rather, the ATO considered that the Court’s finding turned on the particular facts. For example, the property had been leased to 2 unrelated tenants for 2 years before being leased to the daughter at an equivalent market rent, and there was no suggestion that the leasing of the property to the daughter influenced the fund’s investment policy.
- [Equally, the ATO’s attempt to limit this decision to its facts should be taken with caution, too. The central part of this decision was that an investment that performs the same as an arm’s length investment, that itself is an appropriate investment, for a complying superannuation fund, does not breach the sole purpose test, as it achieves the ultimate growth of superannuation benefits, just as an arm’s length investment would.]
The ATO said it is still reviewing the impact of this decision on its public advice and guidance, such as Ruling SMSFR 2008/2. The ATO invites readers to tell them if they feel the Court decision has consequences we have not identified, or if a precedential decision such as a Public Ruling or an ATO ID requires reconsideration or amendment.
COMMENTS are due by 11 January 2019.
CPD (comprehension) questions
- Is a superannuation fund allowed to invest more of its assets, than 5% (by value) in ‘in-house assets’ and under what provision?
- Is an investment in a ‘widely held unit trust’ excluded from the definition of ‘in-house asset’ and under what provision?
- In this case, did the SMSF invest in a ‘widely held unit trust’
- Did the SMSF’s investment in the Sub-Trust class of units, with only other related parties, constitute an investment in an ‘in-house asset’?
- Did the SMSF invest in units in a ‘widely held unit trust’?
- Was the property held in the Sub-Trust leased to the daughter of the SMSF beneficiary?
- Did this result in the SMSF breaching the ‘sole purpose’ test?
- Is the DIS finalised?