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Recent case exposes sole purpose, in-house asset question

Funds

The case: If an SMSF fund member’s daughter is living in student accommodation which the SMSF is also investing in via a sub-fund, does the SMSF breach the sole purpose test?

According to the Commissioner of Taxation, the answer is yes. The Aussiegolfa Pty Ltd (Trustee) v Commissioner of Taxation should be taken as a warning to SMSFs, Cooper Grace Ward Lawyers said, after the Commissioner wielded its power to deem assets as in or out of house assets.

In an insight piece, partners Scott Hay-Bartlem and Clinton Jackson said: “[It] is a reminder to SMSF trustees of the Commissioner’s wide power to deem assets to be in-house assets and of the reach of the sole purpose test when considering investments.”

Aussiegolfa Pty Ltd was the trustee of the Benson Family Superannuation Fund which invested in a managed investment scheme that was run by DomaCom. As part of its return, the fund received units in a sub-trust.

Using the funds from the sub-trust, the fund bought an apartment that would be leased as student accommodation.

Of the three tenants, one was the daughter of the fund’s members and it was proposed that the three tenants pay the same in rent.

The Commissioner decided that: “The trustee of the fund breached the sole purpose test in making an investment for the collateral purpose of providing accommodation to the daughter of the members of the fund,” the partners related.

CGW said the Commissioner’s finding that the fund’s investment in the sub-fund was an in-house asset was “interesting” because: “It shows the Commissioner was prepared to use his powers to deem an asset to be an in-house asset if it otherwise was not an in-house asset. This was ultimately unnecessary as the Court found that the investment was an in-house asset.”

The partners also noted that the court recognised that the acquisition of an investment, with intent to lease it to a relative – even on the same terms as the non-relative tenants – was in breach of the sole-purpose test.

“This highlights the importance of carefully considering the investments of an SMSF, and the width of the sole purpose test requirement,” the partners said.

According to the Federal Court, the sole purpose test is to: “Confine the use of the property to the purpose stipulated and prevent any use of it for any purpose, however minor in importance, which is collateral or independent, as distinguished from incidental to the stipulated use.”

Commenting on the same case, Macquarie Group said the verdict showed that “substance prevails over form” when it comes to the test.

Reflecting on the Court and Commissioner’s finding that the apartment’s sub-fund was a trust “in its own right” and as such was critical in the application of the in-house assets limits, Macquarie said: “Despite the lease of the Burwood apartment to Mr Benson's daughter being on arms-length terms, the Court determined that the sole purpose test was breached by the lease to her.

“SMSF trustees should avoid acquiring and holding assets where there is a collateral or independent purpose which is contrary to the SIS core and/or ancillary purposes.”

Recent case exposes sole purpose, in-house asset question
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