Your SMSF takes units in a registered managed investment scheme. The units sit behind one specific property. At 7.83% of fund assets, you assume the widely held unit trust exception clears the 5% in-house asset cap.
The Full Federal Court disagrees.
Aussiegolfa Pty Ltd (Trustee) v Commissioner of Taxation [2018] FCAFC 122
The structure
The Benson Fund held 25% of the units in a Burwood Sub-Fund of the DomaCom Fund. Mr Benson’s mother held 50%, his sister’s SMSF 25%. Together, 100% of the units in a class attached to one student apartment.
The DomaCom constitution let the responsible entity create classes of units, with assets referable to each class and no cross-indemnity between classes [58]. The PDS stated each sub-fund was a separate trust and that investors took a beneficial interest in the underlying property [147]-[148].
The analysis
First, distinct trust. Once the class was created and the property appropriated to it, a separate trust arose at general law [149]-[151]. Mr Benson and his Part 8 associates had fixed entitlements to 100% of its income and capital, so controlled the trust under s 70E(2)(a) of the SIS Act [104]. It was a related trust. The units were in-house assets under s 71(1).
Second, the widely held unit trust exception in s 71(1)(h) read with s 71(1A) could not rescue it. Once the sub-trust is the relevant trust, the 20 entity test fails [157].
On s 62, the Court went the other way [177]-[178]. Leasing the apartment to Mr Benson’s daughter at market rent did not breach the sole purpose test. There was no financial or non-incidental benefit and no evidence the investment policy had been shaped by the lease. Moshinsky J flagged the limit at [178]: rent below market, or an investment policy influenced by related-party use and a collateral purpose will be inferred.
The practitioner takeaway
The rule tracks substance. An MIS wrapper will not save a fund where the units sit on a class with assets ring-fenced to related holders.
1. Is there a distinct trust at general law over the class assets? Asset segregation plus PDS wording about separate trusts usually means yes.
2. Aggregate Part 8 associates when applying s 71(1A). Family groups collapse to a single entity for the 20 holder and 75% tests.
3. Section 71(4) sits in reserve. Even if the asset falls outside s 71(1), the Commissioner can treat it as in-house where the substance is engaged [227]. The ATO confirmed this in its Aussiegolfa Decision Impact Statement.
Market-rent leasing to a related party is not a safe harbour. The ATO’s view is that a collateral purpose of leasing to an associate can breach s 62 even at market value.
General information only. This note was accurate when written. The law may have changed since and the note is not updated. It is not legal or tax advice, does not take account of your circumstances and must not be relied upon as a substitute for advice on your own matter. If the issue is live for you or your client, email arda@nortonquaytaxlaw.com.au for advice on the current position.