Court case a lesson for SMSFs on sole purpose test
A recent court case involving units in a sub trust demonstrates the reach of the sole purpose test and the extent of the commissioner’s power to deem investments as in-house assets, says an industry law firm.
A recent article written jointly by Cooper Grace Ward partners Scott Hay-Bartlem and Clinton Jackson said this particular court case, Aussiegolfa Pty Ltd (Trustee) v Commissioner of Taxation  FCA1525, involved an SMSF called the Benson Family Superannuation Fund.
“The fund invested in a managed investment scheme run by DomaCom. In return for its investment, the fund received units in a sub trust,” Cooper Grace Ward explained.
“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.
Cooper Grace Ward said the Commissioner decided that the fund’s investment in the sub-fund was an in-house asset, and if it was not an in-house asset, then he would use his powers to deem the investment to be an in-house asset.
The Commissioner also decided that 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,” said Cooper Grace Ward.
“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, said Cooper Grace Ward.