- Investment in sub-fund of widely held trust confirmed as in house asset
- Asset in sub-fund leased at market rates to SMSF member’s daughter deemed not to be breach of sole purpose test
- Is the ATO’s residual in house asset declaration power unconstitutional?
Aussiegolfa Pty Ltd is a SMSF corporate trustee.
Its sole member (Mr Chris Benson) and other related parties elected to invest into the Domacom Fund – a widely held managed investment scheme. This managed fund offers investors the opportunity to invest in a portion of real estate.
Aussiegolfa and its related parties’ money was used to purchase a property in the Melbourne suburb of Burwood. The asset was held in a sub-fund of the Domacom Fund. The sub-fund held one asset and its sole unitholders were Aussiegolfa and its related parties. After about 12 months that property was leased to Mr Benson’s daughter for an arm’s length rent.
This case was primarily caused by the ATO declaring that the Aussiegolfa Domacom sub-fund was a related trust and hence an in house asset of the SMSF and further because the asset in the trust was leased to the member’s child the fund breached the sole purpose test. The ATO also exercised its discretion under Sec 71(4)(b) to declare that the investment was an in house asset.
After an unsuccessful appeal to the Commissioner, the trustee commenced an action in the Federal Court and another in the Administrative Appeals Tribunal.
Late last year the Federal Court agreed with the ATO. The AAT overturned the ATO’s Sec 71(4)(b) in house asset determination because it said it wasn’t necessary as the investment was an in house asset.
The trustee appealed to the Full Federal Court against the judicial decision and the ATO appealed to the same Court against the AAT’s decision.
The trustee lost the appeal in relation to the in house asset rules but successfully argued that the investment didn’t breach the sole purpose test.
The ATO lost its appeal against the AAT decision.
The power of documentation
A key issue in determining that the Domacom sub fund was an in house asset was the wording of the constitution of the Domacom fund and associated amendments that had occurred from time to time as well as product disclosure statements.
The Full Federal Court judgement provided excellent background detail which may in time help other structures avoid the problems Aussiegolfs and Domacom fund encountered.
Sole Purpose Test
As noted the Full Federal Court accepted that the sole purpose test had not been breached. The Court said that because the property was leased to the daughter for market rent “there does not appear to be any financial or other non-incidental benefit” for either the daughter or her father. The court did note that non-market rent might have created a different result.
The ATO’s appeal against the AAT decision
As noted the ATO lost this appeal.
The Court notes that the ATO’s power under Sec 71(4) of the SIS Act appears to be unlimited and the Court then goes onto to say, “A provision cast in such terms, raises the possibility that it is an unconstitutional delegation of legislative power.” Unfortunately a decision on this possibility is put to one side because the Court had decided the asset was an in house asset and hence the ATO did not need to exercise its Sec 71(4) power.
No doubt this will be a matter of conjecture over the following years.
You can read the first judgement here:
Aussiegolfa Pty Ltd as trustee of the Benson Family Superannuation Fund and Commissioner of Taxation (Taxation)  AATA 3013 (14 December 2017)Read more
You can read the second judgement here:
Aussiegolfa Pty Ltd (Trustee) v Commissioner of Taxation  FCA 1525 (14 December 2017)Read more
You can read the third judgement here:
Aussiegolfa Pty Ltd (Trustee) v Commissioner of Taxation  FCAFC 122 (10 August 2018)Read more