The ATO won’t be coming after SMSFs investing through DomaCom over the Sole Purpose Test for their DomaCom investments, but still may look into potential in-house asset issues.
Fractional investing company DomaCom announced to the stock market that it has reached an agreement with the ATO where the ATO won’t apply compliance resources in relation to the Sole Purpose Test where an SMSF invests in a DomaCom sub-fund that owns a residential property and a related party of the SMSF “may happen to become a tenant”.
This follows from an appeal to the Full Federal Court, known as the Aussiegolfa case, in which the judges found that an SMSF which had bought a residential property and some time later leased it to a relative of the member hadn’t breached the Sole Purpose Test, in part because the decision to lease to a relative hadn’t influenced the investment decision. However the Court did find the in-house asset rules were breached. The ATO has issued a Decision Impact Statement on the case.
The ATO says that where an SMSF invests in a Sub-Fund of the DomaCom Fund, signs the ‘Sole Purpose Test Declaration’, keeps a copy of the declaration and gives a copy to the auditor of the fund, and the ATO is “not subsequently made aware of evidence that indicates the trustee has acted inconsistently with the terms of the declaration” than the ATO won’t apply compliance resources to the question of if the fund has breached the Sole Purpose Test through the DomaCom investment.
However the ATO also says it could still “apply compliance resources to scrutinise” if the SMSF has contravened other provisions of the SIS Act, specifically naming the in-house asset rules, and for unrelated breaches of the Sole Purpose Test.
Domacom has agreed to make amendments to the DomaCom Platform to allow for the Declaration, amend its disclosure documents and keep records of the SMSF investors who have or have not signed the Declaration and provide it to the ATO or SMSF auditors when needed.
DomaCom CEO Arthur Naoumidis said he was “pleased to confirm that DomaCom has obtained ATO confirmation on how SMSF trustees in DomaCom can satisfy the Sole Purpose Test after the Full Federal Court of Australia judgement in Aussiegolfa Pty Ltd (Trustee) v Commissioner of Taxation  FCAFC 122”.
“We thank the ATO for providing this practical clarification so that SMSFs can continue to invest in DomaCom property sub-funds where, subject to certain protocols being observed, related parties may happen to become the tenant of the underlying properties.”
The Sole Purpose Test Declaration involves SMSF trustees make a number of statements, including confirming “that the decision to invest in the Sub-Fund has not been influenced by or made for the collateral purpose of providing any other benefit to a [fund member, or ‘relative’ of a fund member, or ‘related party’ of the fund]”.
The Declaration also has SMSF trustees acknowledging that they “will not exert influence over or make requests of DomaCom…[the manager of the sub-fund, or the manager of the property] to have a member, ‘relative’ or ‘related party’ to be placed as a tenant of the Property” and “will not influence or request a member, ‘relative’ or ‘related party’ to apply to become a tenant of the property”.
ATO open to arrangements with other fractional investment companies
The ATO has released a statement on the compliance arrangement with DomaCom, and says it welcomes approaches by other fractional investment companies.
“As indicated in our Decision impact statement, self-managed super fund (SMSF) trustees could potentially contravene the sole purpose test by investing in a Sub-Fund of the DomaCom Fund if the facts and circumstances indicate that the SMSF was maintained for the collateral purpose of providing accommodation to a related party. This is consistent with our long-standing views in SMSF Ruling 2008/2,” says the ATO.
“We welcome others offering similar fractional investment products who are considering the sole purpose test implications of their product to talk with us to explore a similar approach. This supports our continued commitment to provide practical and administrative certainty to SMSF trustees.”
This article has been updated since publication with the comments by the ATO.