Your takeout from the SMSF sole purpose court case of Aussiegolfa versus the ATO HomepageTrusteesYour takeout from the SMSF sole purpose court case of Aussiegolfa versus the ATO Back to Resource Library Opinion piece written by John Maroney, CEO, SMSF Association Published in the Australian Financial Review on 07 November 2018. It is not often there is a full Federal Court decision on any aspect of superannuation law. With the recent decision in Aussiegolfa (trustee) v the Commissioner of Taxation, the full Federal Court examined two critical aspects of the Superannuation Industry (Supervision) Act 1993 (SISA) concerning the sole purpose test and the in-house assets rules and their application to self-managed superannuation funds (SMSFs).Although the court’s observations around the in-house asset rules were important, it is the views expressed about the sole purpose test that have caused the most interest and discussion in the SMSF industry. Broadly, the sole purpose test requires that SMSF trustees make decisions about all aspects of the fund (particularly investment decisions) with the purpose of enhancing the retirement outcomes of the members. While it is accepted that not all investment decisions will meet this objective, it is imperative that the trustees, at the time of making these decisions, have a genuine and bona fide belief that their investment decisions will meet this retirement goal. The residential property was later leased to the daughter of a member of the SMSF. Aussiegolfa is the corporate trustee of the SMSF that was the subject of the court decision. The fund had invested in a managed investment scheme, which in turn invested in a sub-trust that owned residential rental accommodation leased to various tenants. Daughter as tenant While initially rented to arm’s-length tenants, the residential property was subsequently leased to the daughter of a member of the SMSF. It was this arrangement that the Australian Taxation Office (ATO) objected to, arguing that this breached both the sole purpose test and the in-house asset rules of the SISA.In a decision that surprised many industry experts, the full court decided that an SMSF making an investment that was on its own merits a suitable investment for a superannuation fund was sufficient for the SMSF to satisfy the sole purpose test. Even where the SMSF had dealings with a related party about the investment, provided that the dealing was on the same terms as other arm’s-length parties, then the sole purpose test was being satisfied. Critical to the application of the decision to other SMSFs will be the ability of the trustees to demonstrate that the terms of the related party transaction are the same or similar to other arm’s-length transactions involving the same or similar arrangements. The court’s decision turned on the circumstances of the timing of the investment (well before the daughter was considered as a tenant), that she was a suitable tenant for the property, that the leasing of the property was undertaken by unrelated third-party managers and that the residential property was a suitable investment for an SMSF. Before this decision, it had been generally accepted that the inclusion of a related party to any transaction involving an SMSF, where the transaction provided a benefit to the related party, would bring into question whether the sole purpose test would be satisfied. Different outcomes The ATO, as the regulator, has publicly adopted the position that adherence to the sole purpose test required an exclusivity of a retirement purpose that was a higher standard than a dominant or principal purpose. In the regulator’s view, the assessment of whether the sole purpose test has been breached is a question that may have different outcomes for different SMSFs even though each fund may have made similar investments or undertaken similar activities. In other words, all the circumstances and objective assessment of the decisions and actions of the trustees are relevant in determining whether a breach of this requirement has occurred. Whether a benefit derived by the related party was minor, incidental, remote or insignificant or provided at a cost or financial detriment to the SMSF are all relevant considerations. However, no single circumstance itself would determine the outcome as the fund would need to be viewed as a whole. The outcome of this decision is that the reasons for the investment by the trustees of the SMSF becomes the relevant consideration when determining whether the sole purpose test has been satisfied. The ability of trustees to be able to demonstrate objectively those reasons and their compatibility with a retirement purpose, as was the case here, are critical. What is clear is that the breach of other requirements of SISA (as was the case here where the in-house asset rules were found not to be complied with) should not, of itself, be a determining factor in whether the sole purpose test has been satisfied. It is also clear that with a different set of circumstances, the decision could have been different. SMSF trustees would do well to keep this in mind when considering future actions and investments.