Fractional property investment company DomaCom has received clarification from the Australian Taxation Office about its approach to compliance when a self-managed super fund invests in a DomaCom property sub-fund and where a related party of the SMSF may be a tenant.
The ATO has written to DomaCom saying it will not scrutinise a transaction for contravention of the sole purpose test if certain conditions are met. The ATO correspondence clarifies comments it made after a Federal Court ruling on use of DomaCom funds.
Following the case, the ATO said it did not consider that the case was authority for the proposition that a superannuation fund trustee can never contravene the sole purpose test when leasing an asset to a related party because market-value rent is received.
In its letter to DomaCom, the ATO says the following conditions must apply. The trustee of an SMSF:
- invests in a sub-fund of the DomaCom Fund;
- signs a “sole purpose test declaration” accompanying the relevant product disclosure statement;
- retains a copy of the declaration and provides it to their auditor; and
- the ATO is not made aware subsequently of evidence that indicates that trustee has acted inconsistently with the terms of the declaration.
The sole purpose test declaration says: “The sole purpose of the fund’s investment in the [DomaCom] sub-fund is to provide financial returns to provide benefits to the fund’s members upon their retirement…”
The declaration also says: “As trustees, we confirm that the decision to invest in the sub-fund has not been influenced by or made for the collateral purpose of providing any other benefit to a fund member, relative of a fund member or related party of the fund.
DomaCom chief executive Arthur Naoumidis says: “We thank the ATO for providing this practical clarification so that SMSFs can continue to invest in DomaCom property sub-funds where, subject to certain protocols being observed, related parties may happen to become the tenant of the underlying property.”
The interaction between the ATO and DomaCom goes back to 2015, when Aussiegolfa, the trustee of a self-managed superannuation fund, the Benson Family Superannuation Fund, invested in a managed investment scheme known as the DomaCom Fund. The units it acquired were associated with the acquisition of a property in Burwood, Victoria – the Burwood Sub-Fund.
Twenty-five per cent of the units in the sub-fund were held by Aussiegolfa and the balance by relatives of the SMSF member.
The custodian of the DomaCom fund entered into a leasing and management arrangement with Student Housing Australia and in April 2017 Student Housing Australia leased the property to the SMSF member’s daughter.
The sole purpose test requires that a super fund trustee ensure that a fund is maintained for the sole purpose of providing retirement benefits to its members. Leasing an asset to a family member could be a breach of that rule.
Aussiegolfa took a case to court with the support of DomaCom, to test whether the units in the DomaCom fund constituted an in-house asset and whether the leasing of the property to Benson’s daughter was a breach of the sole purpose test.
In a win for DomaCom, the Federal Court ruled that Aussiegolfa did not breach the sole purpose test when the fund leased property to the daughter of the fund member.
Following the case, the ATO published a decision impact statement, saying it did not consider that the case was authority for the proposition that a superannuation fund trustee can never contravene the sole purpose test when leasing an asset to a related party because market-value rent is received.
The ATO said the decision of the court was referrable to the particular facts of the case. Important aspects of the arrangements were that: the property had been leased to two tenants unrelated to the Benson Family Superannuation Fund for two years prior to the premises being leased to the daughter of the member of the BFSF; the daughter paid equivalent market rent to that paid by the two previous tenants; and there was no suggestion that the leasing if the Burwood property to the daughter influenced the BFSF investment policy.
“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 because market-value rent is received.
“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 SIS Act, 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 of 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.”