The ATO has set out its view on the Sole Purpose Test and other implications of the Aussiegolfa Pty Ltd (Trustee) v. Federal Commissioner of Taxation case in a Decision Impact Statement.
Decision Impact Statements are a tool used by the ATO to advise the community on the views of the tax office following from a court or tribunal ruling.
The Aussiegolfa case, which was supported by listed company Domacom, involved questions of the Sole Purpose Test, sub-funds/related trusts and In-House assets. In short, the case revolved around leasing a residential property – held in a sub-fund – to a relative of a member of the SMSF.
The Federal Court initially found that the sub-fund was a ‘related trust’ and the investment in it would be an in-house asset of the SMSF, and that the SMSF had breached the Sole Purpose Test. However on appeal the Full Court found that the first judge had erred in concluding that there had been a breach of the Sole Purpose Test. Neither side decided to appeal to the High Court.
Sole Purpose Test
In terms of the Sole Purpose Test, the ATO says “the Commissioner considers that the decision of the Court is referrable to the particular facts of the case.”
“We do not consider that the case is authority for the proposition that a superannuation fund trustee can never contravene the sole purpose test when leasing an asset to a related party simply because market-value rent is received.”
The ATO notes that the residential property had been leased to two unrelated tenants for two years prior to being leased to the daughter of the member of the SMSF. Also the daughter paid equivalent market rent, and there was “no suggestion” that the leasing to the daughter had influenced the investment policy of the SMSF.
“It is the purpose of making and maintaining a fund’s investments that is central to identifying if there is a contravention of the sole purpose test. We note the observations of the court that a collateral purpose, and a contravention of section 62 of the SISA, could well be present if, for example, the circumstances indicated that leasing to a related party had influenced the fund’s investment policy.”
“For example, in the Commissioner’s view a superannuation fund trustee will contravene the sole purpose test if the fund acquires residential premises for the collateral purpose of leasing the premises to an associate of the fund, even where the associate pays rent at market value.”
Sub-funds / related trusts
The ATO said, in the Decision Impact Statement, that “the decision provides valuable guidance on the factors that might be considered in determining whether a new trust has been created at general law”.
“Whether classes of a trust are in fact separate trusts will depend on the particular facts and circumstances of each case having regard to factors considered by the Court, including the relevant governing and disclosure documents, the ‘terms of issue’ of the class and the general law concept of a trust.”
Though the ATO “does not expect that this case will have a significant impact on traditional multi-class managed funds”.
The ATO says it will continue to consider using its power under the SIS Act to issue a determination “as appropriate in circumstances where the trustee of a SMSF enters into an arrangement to acquire an asset that would otherwise be an in-house asset under section 71 of the SISA if directly held by the SMSF”.
In light of the ruling the ATO is considering updating its other guidance. “We will review our public advice and guidance on the sole purpose test to see if we can more clearly illustrate factors which may be important in determining whether a fund has been maintained for a collateral purpose.”
The ATO has invited comments on the Decision Impact Statement, with a closing date of 11 January 2019.
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