Residential Accommodation and SMSF’s

Most SMSF Trustees know by now that a SMSF generally cannot purchase a residential property and lease it directly to members (or related parties) of the SMSF.

In Aussiegolfa Pty Ltd (Trustee) v Commissioner of Taxation [2017] FCA 1525, the Federal Court considered whether a SMSF’s investment in student accommodation property (through a sub-fund) which was then leased to the daughter of the SMSF’s member was a breach of the sole purpose test and in-house asset test (sections 62 and 71 of the Superannuation Industry (Supervision) Act 1993 (Cth) (“SISA”)).

The key facts of the case were:

1. In February 2015 the member (“Mr Benson”) of the Benson Family Superannuation Fund (“the SMSF”) resolved with his mother, brother and sister to invest in a student accommodation property.
2. Members of the Benson family found a studio apartment in a student accommodation complex (“the Property”) and decided to invest in the Property through Mr Benson’s employer, DomaCom Australia Ltd (“DomaCom”).
3. In March/April 2015, the SMSF invested in a fund managed by DomaCom known as the DomaCom Fund. The Fund was a management investment scheme which allowed investors to invest in fractional interests in property.
4. The DomaCom Fund then created a sub-fund known as the Burwood Sub-Fund (“the Sub-Fund”) to purchase the Property.
5. Settlement of the Property was effected in August 2015 and a leasing and managing authority with Student Housing Australia Pty Ltd (“SHA”) for the Property was entered into. At that time, the unit-holders of the Sub-Fund were the SMSF (25%), Mr Benson’s sister (25%) and Mr Benson’s mother (50%).
6. The Property was rented under two separate agreements from January 2016 to February 2018, to the first and second tenants respectively, for $869.00 per month. These tenants were unrelated to Mr Benson.
7. SHA then entered into an agreement to lease the Property to Mr Benson’s daughter who was studying nearby from 20 February 2018 for monthly rent of $869.00.

The Court found that:

1. the Sub-Fund was a separate trust (and the DomaCom Fund was not the relevant trust) for the purpose of the in-house assets test;
2. the Sub-Fund was not a widely held trust under section 71(4) of the SISA and accordingly the investment breached the in-house asset test; and
3. although there may be circumstances in which a lease to a related party would not breach the sole purpose test, on these facts, the purpose of the investment by the

SMSF in student housing accommodation through DataCom was in part to provide housing to Mr Benson’s daughter and accordingly the investment breached the sole purpose test under section 62 of the SISA.

We understand that the case is on appeal to the Full Federal Court.

This case serves as a caution to SMSF trustees who purchase assets/goods which are made available for their members (or their relatives). In particular, trustees must ensure that SMSFs achieve the objective of providing retirement benefits to their members and that SMSFs are not used to deliver other unrelated benefits to members of the SMSF or their relatives.

If you have any queries regarding the above case or SMSF investments and the sole purpose test or in-house asset test, please contact Peter Duffy or Aman Bargri of our office.