The Aussiegolfa case – substance prevails over form

Strategies

David Barrett
Wednesday 31 January 2018

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.


The arrangement

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:

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.2

So the question before the Court was, was the provision of accommodation to Mr Benson’s daughter a collateral or independent purpose of the investment in the Burwood Sub-Fund, or simply incidental to the stipulated purpose (the stipulated purpose being a core purpose or ancillary purpose)?

The Court noted that the sole purpose test adopts a high standard “to ensure that self managed superannuation funds achieve the objectives of providing retirement benefits and not current day use or benefits.”3

Note that the lease terms with Mr Benson’s daughter appear to have been similar in all material aspects to the terms with the two earlier arms-length tenants.

Nonetheless the Court found that a purpose of the Trustee in holding the units in the Burwood Sub-Fund was to provide accommodation to a related party. This was a collateral purpose not amongst the core or ancillary purposes, and inconsistent with the objective of not providing present benefits or use to SMSF members or relatives.4 It did not help the Trustee that Mr Benson had candidly stated that the use of the Burwood apartment by a lease to his daughter was to test “the related party use of residential property” within SMSFs.5


Conclusions

The Court looked through the DomaCom Fund and determined that the Burwood Sub-Fund was a trust in its own right. This was crucial to the application of the in-house asset rules, resulting in a conclusion that the investment by the Trustee was an in-house asset in breach of the 5 per cent limit.

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.

Share this

If you enjoyed reading this article, why not share it?

Simply copy and paste the text and include a link to the article. Please read the Expertise Articles Terms of Use before sharing.

Related articles


 

Subscribe to our monthly newsletter




We bring you technical updates, financial insights and industry expertise.

Thank you
There seems to be an error with your form

 *
 *
 *
The information you provide on this form will be retained by Macquarie and may, from time to time, be used to contact you about other products and services we feel would be of interest to you. If you do not wish to receive information of this nature or would like access to your personal information, please phone us on 1800 287 153. Please refer to our Privacy Policy for specific details.

Find out how we can help


If you'd like to speak to a specialist about how we can help build your business, get in touch.

1 Aussiegolfa Pty Ltd (Trustee) v Commissioner of Taxation [2017] FCA 1525.

2 Ibid, 29, citing Randwick Corporation v Rutledge (1959) 102 CLR 54.

3 Ibid, 31.

4 Ibid.

5 Ibid, 8 and 30.


Macquarie Investment Management Limited (MIML) ABN 66 002 867 003 AFSL 237 492 is not an authorised deposit-taking institution for the purposes of the Banking Act (Cth) 1959, and MIML’s obligations do not represent deposits or other liabilities of Macquarie Bank Limited ABN 46 008 583 542. Macquarie Bank Limited does not guarantee or otherwise provide assurance in respect of the obligations of MIML.

This information is provided for the use of financial services professionals only. In no circumstances is it to be used by a potential investor or client for the purposes of making a decision about a financial product or class of products.

The information provided is not personal advice. It does not take into account the investment objectives, financial situation or needs of any particular investor and should not be relied upon as advice. Any examples are illustrations only and any similarities to any readers’ circumstances are purely coincidental.

While the information provided here is given in good faith and is believed to be accurate and reliable as at 22 January 2018, it is provided by MIML for information only. We will not be liable for any losses arising from reliance on this information.

MIML and Macquarie Bank Limited do not give, nor purport to give, any taxation advice. The application of taxation laws to each client depends on that client’s individual circumstances. Accordingly, clients should seek independent professional advice on taxation implications before making any decisions about a financial product or class of products.

Except for Macquarie Bank Limited ABN 46 008 583 542 AFSL and Australian Credit Licence 237502 (MBL), any Macquarie entity referred to on this page is not an authorised deposit-taking institution for the purposes of the Banking Act 1959 (Cth). That entity's obligations do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of that entity, unless noted otherwise.

Important Information

Restricted to financial services professionals

This information on this website is provided for the use of financial services professionals only. In no circumstances is it to be used by a potential investor for the purposes of making a decision about a financial product or class of products.

In order to proceed, please confirm that you are a financial services professional by clicking 'I accept'.