SMSFs – beware the sole purpose test!

The recent case of Aussiegolfa Pty Ltd (Trustee) v Commissioner of Taxation [2017] FCA1525 is a reminder to SMSF trustees of the Commissioner’s wide power to deem assets to be in-house assets and of the reach of the sole purpose test when considering investments.

Aussiegolfa Pty Ltd was the trustee of the Benson Family Superannuation Fund. It invested in a managed investment scheme run by DomaCom. In return for its investment, the Fund received units in a sub trust. The funds from the sub trust were used to buy an apartment at Burwood intended to be leased as student accommodation. The other investors in the sub-fund were relatives of the members of the Fund.

Three student tenants were found. Two were unconnected but one was the daughter of the members of the Fund. It was proposed that all three tenants pay the same rent.

The Commissioner decided that:

• the Fund’s investment in the sub-fund was an in-house asset;
• if it was not an in-house asset, then he used his powers to deem the investment to be an in-house asset; and
• the trustee of the Fund breached the sole purpose test in making an investment for the collateral purpose of providing accommodation to the daughter of the members of the Fund.

The Court upheld the Commissioner’s determination that the Fund had breached the in-house asset rules and the sole purpose test.

The case is interesting in that it shows the Commissioner was prepared to use his powers to deem an asset to be an in-house asset if it otherwise was not an in-house asset. This was ultimately unnecessary as the Court found that the investment was an in-house asset.

The Court also recognised that acquiring an investment with the intention of it being leased to a relative (even on the same terms as other tenants) also breached the sole purpose test.

This highlights the importance of carefully considering the investments of an SMSF, and the width of the sole purpose test requirement.

This case will be amongst the topics we discuss at our Annual SMSF Conference on 15 March. Click here for more details.

If you have any questions about any SMSF investments, please contact a member of our superannuation team.