Self-managed superannuation funds (SMSFs) continue to rise in popularity in Australia. However, there are extremely strict rules that apply to the purchase, by an SMSF, of real property, one of which is the ‘sole purpose test’. This test was recently considered in Aussiegolfa Pty Ltd (Trustee) v Commissioner of Taxation 1.
The sole purpose test requires that a super fund is maintained solely for one or more of the prescribed core purposes, being provision of retirement benefits, provision of benefits to members aged 65 and over, or payment of death benefits.
Otherwise, the fund must be maintained solely for one or more of the prescribed ancillary purposes, being the provision of benefits on cessation of work due to ill health, or payment of death benefits.
The Full Federal Court has recently held that a self-managed superannuation fund investing in property and dealing with a related party in an arm’s-length transaction does not breach the sole purpose test. It was however found to be a breach of the in-house asset rules, which limit the in-house assets of a superannuation fund to 5% of the market value of the total assets.
The SMSF in question had invested 7.83% of its assets with related entities in a structure that was intended to buy real estate, which real estate was eventually rented out by the member’s daughter at market value. The initial Federal Court judge agreed with the Australian Taxation Office (ATO) that the investment breached the in-house asset rules and the sole purpose test.
While the Full Federal Court unanimously agreed with the Federal Court judge regarding the in-house asset question, contrary to the judge at first instance, the Full Court determined that the investment did not breach the sole purpose test as the terms of the rental arrangement were the same as they would have been with arm’s-length tenants.
The key factors in this judgement were:
It was held that the incidental outcomes of the investment were not the main focus of this case, rather the Court must consider the underlying reasons for the investment by the SMSF in the first place.
More notably, the decision in Aussiegolfa will change how the ATO applies the sole purpose test in the future. It is, however, important to ensure any related party transaction is at arm’s-length and on market terms, and that evidence supporting the decision as being a commercial one is maintained.
If you would like to discuss proposed or current SMSF investments or any other matter relating to the sole purpose test, please contact our office.
This article was written by Frances Kelly, Graduate, and Sharon O’Toole, Special Counsel
1 Aussiegolfa Pty Ltd (Trustee) v Commissioner of Taxation  FCAFC 122
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