AUSSIEGOLFA PTY LTD (TRUSTEE) V FCT
The Federal Court has ruled that a self-managed superannuation fund (SMSF) investment in a property trust to acquire a fractional interest in a property (to be leased to the member’s daughter) breached the sole purpose test and in-house asset rules under ss 62 and 71 of the SIS Act: Aussiegolfa Pty Ltd (Trustee) v FCT [2017] FCA 1525 (Federal Court, Pagone J, 14 December 2017).
Background
In March 2015, the applicant, as the trustee of a single-member SMSF, invested $28,080 in units in the DomaCom Fund, being a managed investment scheme (MIS) that enables investors to hold fractional interests in property. The invested money was originally held in a cash pool within DomaCom pending the acquisition of a property to be selected by the SMSF trustee. The DomaCom Fund in turn created units in a sub-fund that enabled the SMSF to hold 25% of a property purchased in July 2015 by the responsible entity for $104,000. The property was student accommodation in Burwood Victoria. The other 50% of the units in the sub-fund were held by the mother of the SMSF member (with the other 25% held by his sister’s SMSF).
The custodian of the DomaCom Fund entered into an exclusive leasing agreement with a student housing authority which rented the property to students unrelated to the SMSF for $869 per month. Subsequently, in April 2017, the SMSF member arranged for the student housing authority to lease the property on the same terms to his daughter (a teaching student). The SMSF member was also an employee of the DomaCom Fund and essentially commenced the court proceedings to test the related party use of residential property by SMSFs.
The ATO considered that the leasing arrangement with the daughter breached the sole purpose test and the in-house asset rules as the units amounted to an investment in a “related trust” of the SMSF for the purposes of Part 8 of the SIS Act. The Commissioner also made a determination under s 71(4) of the SIS Act that the units held by the SMSF trustee in the DomaCom sub-fund were to be treated as an investment in a related trust. The SMSF trustee contended that the relevant investment was in the DomaCom Fund (rather than the Burwood property sub-fund) which did not breach the 5% limit for in-house assets under s 82 of the SIS Act, and it was an exempt “widely held unit trust” (s 71(1)(h)).
Decision
In dismissing the SMSF’s application for declaratory relief, the Court ruled that the investment in the units breached the sole purpose test in s 62 of the SIS Act due to the leasing arrangement with the daughter of the SMSF member. The Court found that the investment in the units in the DomaCom Fund was for the collateral purpose of providing housing for a relative, which was not a core purpose, or ancillary purpose, in s 62.
The Court considered that the investment was inconsistent with the underlying objective of s 62 of not providing present benefits or use to members of a SMSF or their relatives. The Court noted that a high standard was adopted by s 62 of the SIS Act as an important pillar to ensure that superannuation funds achieve the objectives of providing retirement benefits and not current day use or benefits. In this respect, the Court said that the reasoning in the landmark “Swiss Chalet” case (AAT Case 10,301 (1995) 31 ATR 1067) remained apt and broadly applicable despite the different facts. While there may be circumstances in which a lease to a related party would not breach the sole purpose test, the Court said the evidence of this case was that the purpose of the SMSF investment in the student accommodation through the DomaCom Fund was, in part, to provide housing for the member’s daughter.
In-house asset rules
The Court also ruled that the SMSF breached the in-house asset rules under ss 71(1) and 82 of the SIS Act after finding that the relevant investment was the units in the Burwood property sub-fund which was separate from the DomaCom Fund.
Notwithstanding that the DomaCom Fund Constitution (as amended) expressly provided that no unit or class of units “gives rise to a distinct trust”, the Court found that the Constitution and product disclosure statements (PDS) created a separate trust in respect of the Burwood property sub-fund. While the responsible entity had trust obligations to other beneficiaries, the Court said it owed no fiduciary duties to the other beneficiaries in respect of the Burwood property which it held for the benefit of the unit holders of the sub-fund. The Court also noted that the rights and entitlements of the units in the sub-fund included 100% of the distributable income or capital in relation to the Burwood property.
In finding that the Burwood property sub-fund was a separate trust, the Court said it was not an exempt “widely held unit trust” under s 71(1)(h) of the SIS Act. A unit trust does not become a widely held unit trust just because it is held by a trustee who holds other funds on trust with similar fiduciary duties to others, the Court said.
The Court further held that the Burwood property sub-fund was a “related trust” under s 10(1) of the SIS Act as the group of Part 8 associates in relation to the SMSF had a fixed entitlement to more than 50% of the capital or income of the trust and, therefore, controlled it under s 70E(2). Accordingly, the Court ruled that the investment in the Burwood property sub-fund (representing 7.83% of the SMSF’s assets), breached the 5% limit for in-house assets.