16 August 2018

We reported the initial Federal Court decision in the Aussiegolfa (DomaCom) case late last year – see here.

The full Federal Court has handed down its decision on the appeals (Aussiegolfa Pty Ltd (Trustee) v Commissioner of Taxation [2018] FCAFC 122). In a decision that surprised many in the industry, the full Federal Court decided that an SMSF making a suitable investment and dealing with a related party on the same terms as arm’s-length parties does not breach the sole purpose test (but the SMSF still breached the in-house asset rules).

What happened in this case?

An SMSF invested 7.83% of its assets with related entities in a structure that was intended to buy real estate that the member’s daughter and other students would rent at market value. The initial Federal Court judge agreed with the ATO that the investment breached the in-house asset rules and the sole purpose test.

Much of the case revolves around the particular rights of the investment (a specific sub-fund in a managed investment scheme), but there is some very important discussion of the sole purpose test.

Decision on appeal

The full Federal Court unanimously affirmed the decision on the in-house asset question, but decided the investment did not breach the sole purpose test as the terms of the rental arrangement were the same as they were with arm’s-length tenants.

This provides a basis for dealings between SMSFs and related parties in situations that, in our experience, the ATO would previously not have been happy with. However, it will be vital to have evidence the terms are the same as they would be with arm’s-length parties, as that was an essential element of the decision in the SMSF’s favour. Had the rental not been at a market rate, then it is likely the decision would have been different and the SMSF breached the sole purpose test.

Other factors discussed by the full Federal Court in coming to their decision included that the timing of the investment was well before any suggestion the property be leased to the member’s daughter, the member’s daughter was a suitable tenant, the property was first leased to other arm’s-length tenants before the member’s daughter, the tenancies were arranged through DomaCom’s Head of Property with no involvement from the member and the property otherwise was a suitable investment.

Implications of decision

This case focusses the attention on the reasons for the investment by an SMSF, rather than the incidental outcomes, when determining whether the sole purpose test has been breached. This is a substantial change in the position previously adopted by the ATO and SMSF auditors when considering at sole purpose test contraventions.

It is also important to be aware the full Federal Court still confirmed the breach of the in-house asset rules, so any arrangement must still not breach other limitations such as buying assets from related parties, providing financial assistance to related parties, and the in-house asset rules.

And there are also numerous anti-avoidance rules to consider too, which give the ATO wide powers to deem investments and transactions to breach specific provisions. In Aussiegolfa, the ATO deemed the investment to be an in-house asset in case it was found not to be an in-house asset under the general rules, and the Federal Court confirmed its power to do so.

If you would like any further information about this, or to discuss proposed or current SMSF investments, please contact a member of our team.

 

This publication is for information only and is not legal advice. You should obtain advice that is specific to your circumstances and not rely on this publication as legal advice. If there are any issues you would like us to advise you on arising from this publication, please let us know.