The Aussiegolfa appeal (Aussiegolfa Pty Ltd (Trustee) v FC of T 2018 ATC ¶20-664  FCAFC 122) is an appeal that involves the provision of residential accommodation to a related party from a superannuation fund. Amongst the wide range of investment rules that apply to superannuation funds these days, there are two key issues that require consideration if you are thinking of processing this kind of transaction:
- the in-house asset rules and the sole purpose test in s 62; and
- 71of the Superannuation Industry (Supervision) Act 1993.
The above two issues were considered and clarified by the Full Federal Court in the Aussiegolfa appeal.
A Brief History about the Aussiegolfa Appeal
- 31 March 2015 — Self Managed Superfunds invested in a DomaCom Fund – a widely held unit trust. The investment comprised less than 1% of the units in the DomaCom Fund.
- – DomaCom Funds allowed the creation of sub-funds. At the time of investment, the constitution and product disclosure statements of DomaCom Funds stated that sub-funds were a separate trust.
- – Under the terms of the DomaCom Fund, the investor can nominate a property to be acquired by the fund.
- 21 July 2015 — DomaCom Fund entered into a contract to acquire property.
- 23 July 2015 and 17 August 2015, the funds that were held for Self-Managed Superfunds were applied to the acquisition of units in the sub-fund. Self-Managed Superfunds and related parties held all of the units in the sub-fund. The property was allocated to that sub-fund.
- Prior to the creation of the sub-fund, the constitution of DomaCom Fund was amended to provide a sub-fund was not a separate trust, but the product disclosure statements continued to make references to a sub-fund as a separate trust.
- Investors in a sub-fund did not have a direct investment in the underlying property but were entitled to 100% of the net income and proceeds of sale of the underlying property of that sub-fund.
- 17 August 2015 — Exclusive management of the property was granted to the Student House in Australia. The first tenancy of the property (from 8 January 2016 for a period of approximately 12 months) and the second tenancy (from 20 February 2017 for a period of approximately 12 months) were granted by the Student House Australia to people not related to Self-Managed Superfunds. The third tenant of the property was the daughter of the sole member of Self-Managed Superfunds at the same rental and on the same terms as that provided to the first two tenants.
- 3 April 2017 — The sole member stated they were using the property to test “the related party use of residential property within” self-managed superannuation funds.
- Importantly, the constitution provided that units in the sub-fund had such rights as a responsible entity determines, there was no evidence of any determination of rights attaching to the units in the Self-Managed Superfunds sub-fund.
First instance decision
In-house asset rules
Pagone J concluded that a sub-fund was a separate trust, relying on a statement in the product disclosure statement which described a sub-fund as a separate trust and various provisions of the constitution of DomaCom Fund.
Sole purpose test
Pagone J concluded there was a breach of the sole purpose test since the purpose was to provide residential accommodation to a related party. This was despite the property being provided to the related party on market rental terms. In reaching its decision, the court relied on a statement by the sole member and sole director of the trustee that he wished to test the ability for residential properties held by SMSFs to be used by related parties. A broad view of the decision is that providing housing to a relative would, in itself, cause a breach of the sole purpose test, irrespective of the terms of the arrangement.
Concern for grandfathered trusts?
Grandfathered trusts are unit trusts established prior to 11 August 1999 where investments by superannuation funds are either made before 11 August 1999 or under transitional rules that applied until 30 June 2009.
There is no specific provision governing the transactions of grandfathered trusts (unlike ungeared trusts which are governed by Div 13.3A of the SISA Regulations).
Some grandfathered trusts own residential property either required prior to 11 August 1999 or acquired after that date from realising other property owned prior to that date.
It is often the case that the in-house asset rules do not apply to leases of property by grandfathered trusts and the question is whether a lease of residential property to a related party would cause a breach of the sole purpose test. The view could be taken that where the property is leased on arm’s length terms at market rental, the sole purpose test may not be breached (although all circumstances of the arrangement must be considered). The same may also apply to unrelated trusts (trusts that are not controlled in any of the three ways described in s 70E(2) of SISA) at least where the lease to the related party was not contemplated at the time of the investment by a superannuation fund.
The first instance decision in Aussiegolfa would have caused a change in that position on the basis of the broad view that any use of housing by a relative would in itself cause a breach of the sole purpose test.