Many readers will be members of Self-Managed Superannuation Funds (SMSFs) and will understand in general terms the limits imposed on SMSFs with respect to the types of investments they can make.
Superannuation legislation prevents s SMSFs from investments in a related party. This is called the ‘in-house asset test’. There are some notable exceptions including that a SMSF can often purchase land and buildings (including farms) upon which the SMSF’s members can conduct their business.
Another prohibition insures that SMSFs cannot use retirement savings accumulated at favourable tax rates to acquire property, for example holiday houses or fast cars, that can be used beneficially by the SMSFs members or family before retirement. This is called the ‘sole purpose test’.
‘Aussiegolfa’ is a horribly aspirational name for the trustee of a SMSF that tested the limits of the sole purpose test in the Federal Court and on appeal.
Aussiegolfa as trustee of the SMSF purchased units in a widely held managed investment scheme called DomaCom. DomaCom purchased various property including student accommodation at Burwood.
Aussiegolfa then acquired a particular class of units in DomaCom, known as the Burwood sub-fund, which were specifically associated with the Burwood accommodation. Other parties related to Aussiegolfa acquired the balance of the majority interest in the Burwood sub-fund.
DomaCom rented out the Burwood accommodation firstly to two tenants unrelated to Aussiegolfa, but then to the daughter of Aussiegolfa’s members. Importantly the daughter paid market rates of rent on the Burwood accommodation, equal to the previous two unrelated tenants.
The primary judge and the Court of Appeal both found that the sub-fund was a distinct trust controlled by Aussiegolfa and its related parties in breach of the in-house asset test.
On appeal the Full Court found that as: the property had previously been tenanted to non-related parties; market rent had been paid by the member’s daughter; and the property was managed by an unrelated entity, the sole purpose test had not been infringed. Any benefit enjoyed by the member’s daughter was merely incidental.
Although it’s unlikely to be an approach widely adopted by advisors, Aussiegolfa supports the proposition that the sole purpose test can be met where a related party has the use of SMSFs assets when market rent is paid.
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