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One would not ordi­nar­i­ly choose to take on the Com­mis­sion­er of Tax­a­tion with­out being well and tru­ly pre­pared for the con­se­quences.

Well, recent­ly, one Mr Ben­son did pre­cise­ly that and, to date, despite some ini­tial set­backs, has had a win.

The Case

With­out going into all the com­plex­i­ties, Mr Benson’s SMSF invest­ed in a trust that owned a stu­dent accom­mo­da­tion com­plex con­tain­ing a num­ber of flats.  The invest­ment enti­tled his SMSF to the income from a par­tic­u­lar flat.  After the SMSF acquired the inter­est, it was decid­ed to lease the flat to his daugh­ter.  It seems Mr Ben­son may have done this inten­tion­al­ly to set up the con­test with the Com­mis­sion­er.

His rea­son may have been that he want­ed to test the lim­its of, among oth­er things, the Sole Pur­pose Test* in the con­text of the Super­an­nu­a­tion Indus­try (Super­vi­sion) Act.  Mr Ben­son was also the Man­ag­er of the man­aged invest­ment scheme, Doma­Com, which owned the accom­mo­da­tion com­plex.  I sus­pect there was a mar­ket­ing oppor­tu­ni­ty for Doma­Com if he obtained the out­come he was seek­ing.

The Sole Pur­pose Test is the leg­isla­tive under­pin­ning of the Government’s over­rid­ing pol­i­cy objec­tives for super­an­nu­a­tion, name­ly ensur­ing retire­ment income for an aging pop­u­la­tion.  There are tax ben­e­fits for super­an­nu­a­tion invest­ment so the law is struc­tured to ensure those invest­ment deci­sions are not about pro­vid­ing present day ben­e­fits for mem­bers.  Rather, the sole pur­pose for which the funds are invest­ed must be mem­bers’ retire­ment incomes.

The Com­mis­sion­er car­ries a very big stick for non-com­pli­ance with the Test and has stip­u­lat­ed in guide­lines issued pri­or to the case that invest­ments must meet strict stan­dards.  There must be exclu­siv­i­ty of pur­pose, not just a dom­i­nant or prin­ci­pal pur­pose.  This does not exclude, how­ev­er, inci­den­tal, remote or insignif­i­cant pur­pos­es or ben­e­fits that might arise besides the sole pur­pose.  So the fact that your cur­rent day tax­able income (and tax lia­bil­i­ty) is reduced does not of itself dis­qual­i­fy the invest­ment, so long as it is an inci­den­tal, remote or insignif­i­cant effect of mak­ing a deci­sion to pro­duce retire­ment income.

The Result

Mr Ben­son lost his first two rounds.  A num­ber of issues were con­sid­ered in Mr Benson’s case in the Admin­is­tra­tive Appeals Tri­bunal and then in the Fed­er­al Court.  The sin­gle judge in the Fed­er­al Court found that Mr Benson’s SMSF had breached the Test by pro­vid­ing accom­mo­da­tion to a rel­a­tive, name­ly Mr Benson’s daugh­ter.  The deci­sion was also seem­ing­ly influ­enced by an email from Mr Ben­son that quite blunt­ly said that he was using the pro­posed lease to test the relat­ed par­ty use of res­i­den­tial prop­er­ty with­in self-man­aged super­an­nu­a­tion funds.

Hav­ing lost these rounds, Mr Ben­son stuck to his guns and appealed to the Full Court of the Fed­er­al Court of Aus­tralia.  There, the three judges unan­i­mous­ly held that the fact that a relat­ed par­ty enjoys the use of an SMSF asset does not in itself mean the Sole Pur­pose Test has been breached.

In this case the facts estab­lished:

  • The deci­sion to lease was made two years after the asset was acquired
  • The rent payable, met mar­ket expec­ta­tions
  • The daugh­ter was a per­fect­ly accept­able ten­ant and she didn’t receive any ben­e­fit — after all she was oblig­ed to pay mar­ket rent
  • The SMSF was in receipt of the same income it would have received had it leased it to anoth­er
  • There was noth­ing to sug­gest this was an impru­dent trans­ac­tion
  • The email, sug­gest­ing an ulte­ri­or pur­pose, was sent by Mr Ben­son in his role at Doma­Com and not in his trustee role in his SMSF

Key lessons

Many con­sid­er that the out­come of this case is sur­pris­ing and has pushed back the lim­its of the Sole Pur­pose Test.  It is yet to be seen whether the ATO will appeal.

But even if the Full Court deci­sion stands, trustees of SMS­Fs need to be care­ful.  In real­i­ty, I don’t think ter­ri­bly much has changed from pri­or to Mr Benson’s case (Aussiegol­fa Pty Ltd v. Com­mis­sion­er of Tax­a­tion).

The out­come for the fol­low­ing exam­ples would not be affect­ed by the case:

Exam­ple 1:

Caus­ing your SMSF to buy a newsagency (or any busi­ness) so as to employ your­self or your child may be ques­tion­able.

Exam­ple 2:

Buy­ing busi­ness real prop­er­ty and leas­ing it to a relat­ed enti­ty to con­duct a busi­ness has been accept­able for many years, but if the rent is a dis­count to the mar­ket, then it may result in a breach of the test.  The SMSF will need evi­dence show­ing:

  • the rent is at mar­ket val­ue; and
  • the lease terms are those one would objec­tive­ly expect in an arms-length trans­ac­tion.

Exam­ple 3:

Buy­ing a hol­i­day apart­ment which is man­aged by inde­pen­dent man­age­ment and rent­ed out to third par­ties at mar­ket rates should meet the Sole Pur­pose Test.

But what is the posi­tion if the mem­ber then decides to stay at the prop­er­ty?  The ATO sug­gests that if the mem­ber pays the mar­ket rates to the man­age­ment agent then there should not be any breach of the Test.  How­ev­er, reserv­ing one month a year for the fam­i­ly at no cost will cause sig­nif­i­cant prob­lems.

The take home mes­sage is to ensure you are clear that the pur­pose for your invest­ment deci­sions are for retire­ment pur­pos­es only.

If you are unsure to the pur­pose for your invest­ment, we sug­gest you seek legal advice.

Hadyn Ori­ti is a Part­ner with Dono­van Oates Han­naford. He has a wealth of expe­ri­ence in Estate Plan­ning and Self-Man­aged Super­an­nu­a­tion Funds.

If you would like to dis­cuss any issues you may have with respect to your Self-Man­aged Super­an­nu­a­tion Fund, please con­tact Hadyn on 02 6583 0427 or horiti@dohlaw.com.au

*This is a test that ensures a super­an­nu­a­tion fund is main­tained for the pur­pose of pro­vid­ing ben­e­fits to its mem­bers upon their retire­ment or for ben­e­fi­cia­ries if a mem­ber dies.

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