We previously reported on the Federal Court decision of Aussiegolfa v FTC here and here. The Full Federal Court has now handed down its appeal decision. This case is important because it considers two key planks of the superannuation prudential standards, the in-house asset rules and the sole purpose test. This snippet looks at the latter, another snippet looks at the former.
The Court’s findings in relation to the sole purpose test are significant for self managed superannuation fund’s (SMSF). In simple terms, the sole purpose test provides that an SMSF must be managed for the sole purpose of providing retirement or death benefits.
Here, the SMSF invested in a sub-fund of a managed investment scheme which held a student apartment. Subsequently, the managed investment scheme rented out the apartment to the daughter of a member of the SMSF. The ATO argued that this was in breach of the sole purpose test because the SMSF’s investment in the sub-fund included a purpose of renting out the student apartment to a related party of the SMSF.
The Court found that the SMSF’s investment did not breach the sole purpose test because the apartment was rented to the daughter for an arm’s length rent. The Court found there was no “financial or other incidental benefit” to the daughter. Therefore, the SMSF was being run for the sole purpose of providing retirement or death benefits.
Importantly, the Court drew a distinction between the motive of the parties and the purpose for which the SMSF is maintained. That is, there may be personal motives for entering into related party dealings but they won’t detract from the fact that the objective purpose of entering into the arrangement (on arm’s length terms) is to generate a return for the SMSF and ultimately provide retirement benefits.
The reason this is significant is that it shows that related party dealings, in themselves, will not breach the sole purpose test, especially if they are arm’s length terms. This is likely to be a set back to the ATO as they have increasingly taken an expansive view of the sole purpose test for SMSFs that have related party dealings, even where those related party dealings are on an arm’s length basis.
To discuss this further or for more information please contact:
Phil Broderick
Principal
Sladen Legal
T +61 3 9611 0163 l M +61 419 512 801
Level 5, 707 Collins Street, Melbourne, 3008, Victoria, Australia
E: pbroderick@sladen.com.au
Ashleigh Eynaud
Associate
Sladen Legal
T +61 3 9611 0129
Level 5, 707 Collins Street, Melbourne, 3008, Victoria, Australia
E: aeynaud@sladen.com.au
