The decision in Aussiegolfa1 was handed down by the Federal Court of Australia on 14 December 2017.
It involved application of the Superannuation Industry (Supervision) Act 1993 (SIS) in-house asset rules and the sole purpose test to a self managed super fund (SMSF) arrangement.
The decision is a reminder to SMSF trustees and their advisers that the courts may favour a “substance over form” approach when applying the super laws to SMSF arrangements.
Mr Benson was the sole member of an SMSF with a corporate trustee, Aussiegolfa Pty Ltd (the Trustee). Mr Benson, his sister and mother resolved in 2015 to invest in a unit of student accommodation in Melbourne (Burwood apartment) via a managed investment scheme (DomaCom Fund), operated by DomaCom Australia Ltd (DomaCom). For Mr Benson's part, the investment was made by the Trustee.
DomaCom established a sub-fund (Burwood Sub-Fund) within the DomaCom Fund, the sole asset of which was the Burwood apartment. The Trustee and Mr Benson’s sister each agreed to purchase 25 per cent of the units in the Burwood Sub-Fund, while Mr Benson's mother agreed to purchase the remaining 50 per cent.
Two students, both unknown and unrelated (i.e. arms-length) to Mr Benson, agreed to lease the Burwood apartment for consecutive periods in 2016 and 2017. In 2017, Mr Benson’s daughter, also a student, agreed to lease the Burwood apartment from February 2018, on very similar terms to the unrelated tenants.
The Commissioner’s determination
The Commissioner of Taxation concluded that the Burwood Sub-Fund was a separate trust, not merely part of the broader DomaCom Fund. As a separate trust, it did not meet the criteria of a widely held unit trust in the in-house asset rules.
Consequently the Commissioner determined that the units held by the Trustee in the Burwood Sub-Fund were an investment in a related trust of the SMSF, and the investment exceeded the in-house asset limit of 5 per cent.
The Commissioner also determined that leasing the property to Mr Benson’s daughter caused the SMSF to breach the sole purpose test.
The Trustee applied to the Federal Court for declarations challenging the Commissioner’s determination.
The Federal Court’s decision
In short, the Court agreed with the Commissioner.
Mr Benson’s sister and mother were Part 8 associates of Mr Benson, as defined in SIS. If the Burwood Sub-Fund was a separate trust, it would be a related trust for the purposes of the in-house assets rules, as the Benson parties form a “group” controlling the trust. Consequently the investment by Mr Benson’s SMSF would breach the in-house assets rules.
However, if the Burwood Sub-Fund was not a separate trust, and as the combined fixed entitlements of the Benson parties were less than one per cent of the total units in the DomaCom fund, the investment by Mr Benson’s SMSF would not be in a related trust, and there would be no breach of the in-house assets rules.
The Court held that despite conflicting provisions contained in the Constitution governing the DomaCom Fund, the Constitution created the Burwood Sub-Fund as a separate trust. The Constitution imposed separate fiduciary duties on the responsible entity to the unit holders of the Burwood Sub-Fund, the units in the sub-fund were in respect of a specific asset, and all proceeds and income from that asset were to be dealt with for the separate class of unit holders (the sub-fund unit holders). Each sub-fund within the DomaCom Fund related to an identifiable asset held on trust pursuant to terms referable to that asset.
The whole of the net income of each sub-fund was received by the unit holders of that sub-fund. That is, the rights and entitlements of the units in the Burwood Sub-Fund included an entitlement to 100 per cent of the distributable income and capital from the Burwood apartment. No other member of the DomaCom Fund had any entitlement to the income or capital in relation to the Burwood apartment.
Furthermore, the Court held that despite the DomaCom Fund involving many hundreds of unit holders, the conclusion that the Burwood Sub-Fund was a separate trust excluded the other unit holders (i.e. those holding units other than in the Burwood Sub-Fund) from the determination of whether the widely held trust exception in the in-house asset rules applied. So the Court concluded that the Trustee's investment was not in a widely held unit trust.
The sole purpose test
The SIS sole purpose test requires the trustee of a super fund to ensure the fund’s assets are used solely for one or more core purposes, and optionally and additionally for one or more ancillary purposes.
According to the Federal Court, the words in the sole purpose test: