Daughter's rental passes the tax test

A father was able to lease to his daughter a property owned by his self-managed superannuation fund (SMSF) without breaching the sole-purpose test, a court found.

The decision may have profound implications for the leasing of SMSF properties to related parties, a relationship often considered off limits. When university student Emma Benson rented a unit part-owned by her father’s Benson Family Super Fund, the Australian Tax Office said it was a breach of the sole-purpose test. In December last year, the Federal Court agreed.

But the decision has this month been overturned, with a Full Court of the Federal Court finding any benefits derived were ‘merely incidental’. The sole-purpose test requires super assets to be managed exclusively for the purpose of providing retirement benefits.

Sladen Legal principal Phil Broderick said the court was swayed because the apartment was leased to Ms Benson at an arm’s length price. "The court found there was no financial or other incidental benefit to the daughter," he said. "Therefore, the SMSF was being run for the sole purpose of providing retirement or death benefits."

Mr Broderick said the ATO might have to rethink its approach. "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," he said.

"I think this will be a setback 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."

The ATO has not yet decided whether to appeal. A spokesman warned about interpreting the decision too liberally: "Any question of whether an SMSF is maintained in accordance with the sole-purpose test will turn on the particular facts and circumstances of that SMSF and its investments."

Christopher Benson is the Victorian state manager of ASX-listed Domacom, a fractional property investment platform. In fractional property investment, an investor buys a portion of a property and is entitled to a share of the rent it earns.

In 2015, the Benson SMSF became a part-owner of an apartment in Burwood through a sub-fund of the wider Domacom Fund. Ms Benson became the property’s third tenant.

Domacom chief executive Arthur Naoumidis, who set out to test the law as it pertains to related-party tenancies, said the decision was a game-changer for Baby Boomers wanting to help their children into property.

The idea is that both parties would tap their super to co-invest in property. The junior party would use their growing super balance to progressively acquire equity from his or her parents.

"The big-picture objective is to provide a way for younger generations to use their super to co-invest with their parents in property, and be able to rent the property," Mr Naoumidis said. "Now that the court has ruled that our investment sub-fund does not breach the sole-purpose test, we cannot for the life of us see why the ATO will continue fighting this."

DBA Lawyers director Daniel Butler said the decision was a ‘major win for SMSFs and taxpayers’. It confirmed that arrangements on arm’s length terms typically did not contravene the sole-purpose test. It also clarified the word ‘benefit’ in the sole-purpose test referred to a financial benefit rather than a ‘current day benefit’ such as providing accommodation to a relative.

DBA Lawyers provided some advice about the case to Domacom but did not act for the company.

Source: AFR 25-26 August 2018