Aussiegolfa Pty Ltd as trustee of the Benson Family Superannuation Fund and Commissioner of Taxation (Taxation)

[2017] AATA 3013

Aussiegolfa Pty Ltd as trustee of the Benson Family Superannuation Fund and Commissioner of Taxation (Taxation) [2017] AATA 3013 (14 December 2017)

Division:TAXATION & COMMERCIAL DIVISION

File Number:           2017/4913

Re:Aussiegolfa Pty Ltd as trustee of the Benson Family Superannuation Fund

APPLICANT

AndCommissioner of Taxation

RESPONDENT

DECISION

Tribunal:Deputy President Pagone

Date:14 December 2017

Place:Melbourne

The Tribunal sets aside the decision to make the determination on 3 July 2017 under s 71(4)(b) of the Superannuation Industry (Supervision) Act 1993 (“the SIS Act”) that the units held by Aussiegolfa Pty Ltd as trustee of the Benson Family Superannuation Fund (“the Benson Fund”) in DomaCom Sub‑Fund DMC0114AU are to be treated as an investment in a related trust in the Benson Fund and in substitution for that decision the Tribunal decides pursuant to s 43(1)(c)(i) of the Administrative Appeals Tribunal Act 1975 that the determination be revoked.

.........[sgd]...............................................................

Deputy President Pagone

Catchwords

TAXATION – review of decision of Commissioner of Taxation – determination pursuant to section 71(4)(b) of the Superannuation Industry (Supervision) Act 1993 (Cth) – whether investment in related trust – determination to be set aside

Legislation

Administrative Appeals Tribunal Act 1975 (Cth)
Income Tax Assessment Act 1997 (Cth)
Superannuation Industry (Supervision) Act 1993 (Cth)

REASONS FOR DECISION

Deputy President Pagone

1. The applicant (“Aussiegolfa”) has applied to the Tribunal to review a determination by the Commissioner dated 3 July 2017 (“the determination”) made under s 71(4)(b) of the Superannuation Industry (Supervision) Act 1993 (Cth) (“the SIS Act”) that the units held by Aussiegolfa as trustee of the Benson Family Superannuation Fund (“the Benson Fund”) in DomaCom Sub-Fund DMC0114AU are to be treated as an investment in a related trust in the Benson Fund. The application was heard by the Tribunal immediately after the hearing by the Federal Court of Australia of proceeding VID 532 of 2017 in which Aussiegolfa sought declarations as against the Commissioner in respect of the investment and the Benson Fund. The evidence in the Federal Court proceeding was evidence also in the Tribunal and some of the submissions in the Federal Court proceedings were submissions also in the Tribunal.

2. Aussiegolfa is the trustee of the Benson Family Superannuation Fund (“the Benson Fund”) which was established on 20 November 2011 as a self-managed fund within the meaning of s 17A(2) of the SIS Act. Mr Christopher Benson is the sole member of the Benson Fund and since January 2015 has been employed as the Victorian State Manager of DomaCom Australia Ltd (“DomaCom”). DomaCom holds an Australian Financial Services Licence issued by the Australian Securities and Investment Commission (“ASIC”) and DomaCom manages a fund (“the DomaCom Fund”) which is a managed investment scheme established to provide investors with the opportunity to invest in fractional interests in property. The DomaCom Fund is a trust declared by the responsible entity and is governed by a Constitution dated 13 December 2013 as amended from time to time. Perpetual Trustee Services Ltd is the responsible entity of the DomaCom Fund, Perpetual Corporate Trust Ltd is the custodian of the DomaCom Fund, and DomaCom is its investment manager.

3. Mr Benson resolved with his mother, brother and sister at a family meeting in February 2015 to invest in residential property in Melbourne in student accommodation and other relatively low cost, relatively high return opportunities.  His mother is a self-funded retiree living in Melbourne and his brother and sister set up their own self-managed superannuation funds shortly after the February meeting.  In March 2015 Mr Benson, with members of his family, inspected a prospective studio apartment in a student accommodation complex located at Unit 1, 390 Burwood Highway, Burwood, Victoria (“the Burwood property”) and decided to invest in the Burwood property through DomaCom by Mr Benson's mother acquiring 50% of the units in a sub-fund of the DomaCom Fund and Mr Benson and his sister each agreeing to purchase 25% of the units in the sub‑fund.  Mr Benson’s brother decided not to participate in the acquisition of any units because his wife became unwell at about the time of the decision to make the investment.

4. On 31 March 2015 Aussiegolfa completed and forwarded an application to invest in DomaCom through which DomaCom would acquire the Burwood property. The application was for a minimum investment of $20,000 to establish an account in the DomaCom Fund. The application acknowledged that Mr Benson had received a product disclosure statement and that the application for Aussiegolfa to become an investor, if accepted, would “be subject to the terms and conditions of the Constitution and [the] product disclosure statement”. $28,080 was paid by Aussiegolfa from the Benson Fund for investment in DomaCom with the acquisition of 28,080 $1 units in a sub-fund by an initial investment of $20,000 around 2 April 2015 and a further $8,080 soon after. The $28,080 paid by Aussiegolfa at that time was held by the responsible entity in a Cash Pool pending acquisition by the responsible authority of the Burwood property.

5. In July 2015 DomaCom completed due diligence, contract review and valuation procedures in respect of the Burwood property.  On 17 July 2015 the responsible entity issued a supplementary product disclosure statement (“the supplementary product disclosure statement”) supplementing the product disclosure statement which the responsible entity had issued on 24 June 2015.  There had been earlier product disclosure statements including one dated 1 February 2015, but nothing appears to turn upon the differences between any of the public disclosure statements including those dated 1 February 2015 and 24 June 2015. 

6. The supplementary disclosure statement of 17 July 2015 set out the information regarding the acquisition of the Burwood property and the establishment of a proposed sub-fund of the DomaCom fund through which DomaCom would hold the Burwood property. On 21 July 2015 the responsible entity purchased the Burwood property for $104,000 on a contract of sale settled on 18 August 2015. A Sub‑Fund (“the Burwood Sub‑Fund) was established within the DomaCom Fund upon acquisition of the Burwood property, and a class of units unique to the Burwood Sub-Fund was created. The supplementary disclosure statement was an invitation to invest in the sub-fund by application which was required to be made by 23 July 2015, but the application which had been made on 31 March 2015 appears to have been taken as sufficient for the subsequent creation of the Burwood Sub-Fund and for the allocation of units to Aussiegolfa pursuant to the DomaCom Constitution. Ross Laidlaw, the director and Chief Operating Officer of DomaCom, explained that a new sub fund was created with the issue of a new and unique class of units as soon as a binding contract to purchase the property was entered into and the initial deposit had been paid. The responsible entity did not pass a resolution to amend the Constitution to create the new units but a new class of units was created by the creation of an Asia-Pacific Investment Register code being allocated to units which identified products for the financial services industry. On 23 July 2015 and 17 August 2015, funds held for Aussiegolfa in the Cash Pool were applied towards the acquisition of units in the Burwood Sub-Fund.

7. On 17 August 2015 the custodian entered into an exclusive leasing and managing authority with Student Housing Australia Pty Ltd ("Student Housing Australia").  Student tenants for the Burwood property were found by Student Housing Australia as agent for DomaCom.  The first two tenants of the Burwood property found by Student Housing Australia were persons unknown, and unrelated, to Mr Benson, or to the Benson Fund.  The first person agreed to pay a monthly rental of $869 for the premises from 8 January 2016 to 23 January 2017.  The second tenant also agreed to pay a monthly rent of $869 for the premises for the period from 20 February 2017 until 15 February 2018.  The third tenant of the Burwood property selected by Student Housing Australia on behalf of DomaCom was Mr Benson's daughter, Emma Benson, who is a full-time student aged 20 years studying primary teaching at Swinburne University's Hawthorn, Victoria campus. 

8. The selection of Emma Benson as the tenant of the Burwood property is explained, in part by the desire of Mr Benson, and of DomaCom, to test the ability for residential properties held by self-managed superannuation funds to be used by related parties.  On 3 April 2017 Mr Benson (as DomaCom’s Victorian State manager) informed DomaCom’s client services manager in an email that Mr Benson and some family members were using the Burwood property to test "the related party use of residential property within" self‑managed superannuation funds.  On 11 April 2017 Mr Benson submitted a completed application form to Student Housing Australia on behalf of his daughter to lease the Burwood property from 20 February 2018 at a monthly rent of $869.  Mr Benson was identified in the application as the parental guarantor guaranteeing his daughter's obligations under the proposed lease.  On the same day Student Housing Australia wrote to Ms Benson congratulating her on securing the tenancy of the Burwood property at the rent which had been proposed in the application.  At about the same time Ms Benson signed a standard form Residential Tenancy Agreement for the property providing for rental from the period 20 February 2018 until 19 February 2019 at the monthly rent of $869.

9. The Benson Fund is eligible for concessional tax treatment under Division 295 of the Income Tax Assessment Act 1997 (Cth) (“the 1997 Act”) provided that it is a complying superannuation fund. Section 45 of the SIS Act provides that a superannuation fund is a “complying superannuation fund” for the purposes of the 1997 Act, amongst others, if it is has received a notice to that effect under s 40 from the regulator and has not received a notice subsequently stating that it is not a complying superannuation fund. Section 45 provides:

   Complying superannuation fund

   (1)A fund is a complying superannuation fund for the purposes of the Income Tax Assessment Act in relation to a year of income (the current year of income) if, and only if:

   (a)the Regulator has given a notice to a trustee of the fund under section 40 stating that the fund is a complying superannuation fund in relation to the current year of income; or

   (b)the Regulator has given a notice to a trustee of the fund under section 40 stating that the fund is a complying superannuation fund in relation to a previous year of income and has not given a notice to a trustee of the fund under that section stating that the fund was not a complying superannuation fund in relation to:

   (i)the current year of income; or

   (ii)a year of income that is:

   (A)later than that previous year of income; and

   (B)earlier than the current year of income. 

   (2)Despite section 2, the previous year mentioned in paragraph (1)(b) may be a year of income earlier than the 1994-95 year of income (see section 49). However, despite section 49, if the fund was not a regulated superannuation fund at all times during the current year of income when the fund was in existence, paragraph (1)(b) does not apply unless the previous year of income is the 1994-95 year of income or a later year of income.

   (3)For the purposes of this section, if a notice under section 40 is revoked, or the decision to give the notice is set aside, the notice is taken never to have been given.

   (4)Section 170 of the Income Tax Assessment Act does not prevent the amendment of an assessment at any time for the purposes of giving effect to subsection (3).

   (5)For the purposes of this section, if a notice under section 40 is given in relation to a fund in relation to a year of income, the notice is taken to have been given at the beginning of the year of income.

   (6)Despite subsection (1), if, at all times during a year of income when a fund was in existence, the fund was, or was part of, an exempt public sector superannuation scheme, the fund is a complying superannuation fund in relation to the year of income for the purposes of the Income Tax Assessment Act.

   On 15 February 2013 the Commissioner issued a notice under s 40 to the Benson Fund, and there is no dispute, that it was a complying superannuation fund except for the dispute between the parties about the effect upon the Benson Fund of a lease to Ms Benson.

10. Section 42A(1) of the 1997 Act provides that a self-managed superannuation fund will be a complying superannuation fund for a year of income if it is a resident regulated superannuation fund at all times during the year and it passes the test in s 42A(5) in relation to that year of income. Section 19 defines a “regulated superannuation fund” as a superannuation fund with a trustee where, relevantly, the governing rules of the fund provide that the sole and primary purpose of the fund is the provision of old-age pensions and the trustee or trustee of the funds have given a written notice electing that the SIS Act is to apply in relation to the fund. The test in s 42A(5) requires that no trustee of the entity contravene any of the “regulatory” provisions in relation to the entity during the year of income or part of the year of income. The sole purpose test in s 62(1) and the obligation to comply with the in‑house asset rules in s 84(1) are each “regulatory” and “civil penalty” provisions, the breach of either of which will have compliance consequences for the Benson Fund under s 42A(5) of the 1997 Act.

11. Section 84 of the SIS Act requires the trustee of a regulated superannuation fund to take all reasonable steps to ensure that, relevantly, Divisions 2 and 3 of the SIS Act are complied with. Section 82, in Division 3, applies to a regulated superannuation fund and requires the market value of the fund’s “in-house assets” not to exceed 5% of the fund’s assets at the end of the year of income. Section 82 provides:

    All funds--market value ratio for the 2000-2001 year of income and later years of income

    (1)      This section applies to a regulated superannuation fund.

    (2)If the market value ratio of the fund's in-house assets as at the end of:

    (a)       the fund's 2000-2001 year of income; or

    (b)       a later year of income;

    exceeds 5%, the trustee of the fund, or, if the fund has a group of individual trustees, the trustees of the fund, must prepare a written plan.

    (3)The plan must specify the amount (the excess amount ) worked out using the formula:

    (4The plan must set out the steps which the trustee proposes, or, if the fund has a group of individual trustees, the trustees propose, to take in order to ensure that:

    (a)one or more of the fund's in-house assets held at the end of that year of income are disposed of during the next following year of income; and

    (b)the value of the assets so disposed of is equal to or more than the excess amount.

    (5)The plan must be prepared before the end of the next following year of income.

    (6)Each trustee of the fund must ensure that the steps in the plan are carried out.

    The units acquired by Aussiegolfa in DomaCom represented more than 5% of the total assets of the Benson Fund as at the date of acquisition and in the years of income ended 30 June 2014 and 30 June 2015.  Aussiegolfa’s investment in the DomaCom Fund as at 21 April 2017 represented 7.83% of its assets.

12. It is the Commissioner’s view that the leasing arrangement with Ms Benson causes the Benson Fund to breach the sole purpose test and the in‑house asset rules in the SIS Act. In May 2017 Aussiegolfa commenced proceedings in the Federal Court seeking, amongst other matters, declarations that leasing the property to Ms Benson would not result in Aussiegolfa breaching the in-house assets test in Part 8 of the SIS Act. On 3 July 2017 the Commissioner made the determination under s 71(4) of the SIS Act and the validity of the determination is challenged by Aussiegolfa in the Federal Court proceedings. The determination, unless held by the Court to be invalid or set aside by the Tribunal, would cause the Benson Fund to breach the “in-house asset test” of the SIS Act. On 21 July 2017 Aussiegolfa requested the Commissioner to review the determination but on 4 August 2017 the Commissioner confirmed the decision to make the determination. On 16 August 2017 Aussiegolfa applied under s 344(8) of the SIS Act for the Tribunal to review the Commissioner’s decision to affirm the determination.

13. Section 344(1) provides that a person affected by a “reviewable decision” of the regulator may, if dissatisfied with the decision, request the regulator to reconsider the decision. The “regulator” for these purposes is the Commissioner and a “reviewable decision” for these purposes is defined by s 10 to include the decision to make a determination under s 71(4) as well as a decision refusing to revoke a determination under s 71(4). The formal application to the Tribunal identified the decision under review as that dated 3 July 2017 (being the Commissioner’s determination under s 71(4)) rather than the Commissioner’s decision made on 4 August 2017 refusing to revoke the determination. The parties have since conferred and have agreed, consistently with the formal application to the Tribunal, that the decision under review was the decision to make the determination that is reviewable under s 10(1)(k) of the SIS Act rather than the subsequent refusal to revoke the determination that would have been reviewable under s 10(1)(l) of the SIS Act. It is not clear whether the parties were correct in their agreement and it may be necessary for there to be further submissions upon the formal identification of the decision under review and the form of the Tribunal’s decision. It is clear, however, that Aussiegolfa seeks to have the Tribunal set aside the effect of the determination which was made under s 71(4)(b) of the SIS Act.

14. The Commissioner may determine under s 71(4)(b) that an asset is to be taken to be an investment in a related trust where an asset of the fund consists of an investment “other than an in-house asset”. Section 71(4) provides:

    (4)       If:

    (a)apart from this subsection, an asset of a fund consists of a loan, an investment, or an asset subject to a lease or lease arrangement, other than an in-house asset; and

    (b)the Regulator, by written notice given to a trustee of the fund, determines that the asset is to be treated, with effect from the day on which the notice is given, as if the asset were a loan to, an investment in, or an asset subject to a lease or lease arrangement with, a specified related party or related trust of the fund, including a person taken to be a standard employer-sponsor of the fund under section 70A;

    then, despite paragraphs (1)(a) to (j), the asset is taken, for the purposes of this Part, to be a loan to or an investment in the related party or related trust, or an asset subject to a lease or lease agreement between a trustee of the fund and the related party.

    Paragraph (1)(e) determinations or paragraph (1)(j) regulations may be retrospective.

    It is a condition to the power to make the determination by the Commissioner, and a condition to the exercise of the powers and the discretions by the Tribunal, that the asset of the Benson Fund consisted of an investment “other than an in-house asset”. The drafting of s 71(4) may not be as clear as it might be but its purpose appears to be to supply an element required in the operation of s 71(1) for the requirement to its operations that an asset of a superannuation fund be an in‑house asset within the basic meaning of that provision. The definition in s 71(1) of an in‑house asset makes an asset an in‑house asset where, amongst other conditions, it consists of an investment in a related trust. A determination under s 71(4) supplies that condition upon which the definition may operate to cause the asset to be an in‑house asset.

1. In the present case the objective condition that needs to exist before a determination can be made under s 71(4)(b) is absent because the reasons and conclusions in the Federal Court proceedings would also lead the Tribunal to decide that the investment by Aussiegolfa in DomaCom was in units which are assets that consist of an in‑house asset. The facts and reasons in the decision of the Federal Court should be read with these reasons to the extent that they relate to whether the investment in the Burwood Sub‑Fund consists of an in‑house asset. It follows, therefore, that the condition for making a determination under s 71(4)(b) is absent and that the Tribunal should set it aside. It is desirable, however, to say that the Commissioner’s determination would have been affirmed if the asset had been found to have consisted of an investment other than an in‑house asset. That is because the investment would be in substance, and in practical effect, the same as an in‑house asset and within the purpose sought to be achieved by limiting investments in in‑house assets to 5%, even though it might in legal form not be an in‑house asset.

2. The primary policy objective of the superannuation investment rules was described in the explanatory memorandum accompanying the 1999 amendments as follows:

   The primary policy objective is to ensure that the investment practices of superannuation funds are consistent with the government’s retirement incomes policy.  That is, superannuation savings should be invested prudently, consistently with the SIS requirements, for the purpose of providing retirement income and not for providing current day benefits.

   The practical effect and substance of the investment by Aussiegolfa in DomaCom was to provide current day benefits to a party related to the Benson Fund. 100% of the income and capital of the Burwood Sub‑Fund is held and applied by the responsible entity for the sole benefit of Aussiegolfa, and the other Part 8 associates. The unit holders control the duration of the Burwood Sub‑Fund and have the power to terminate it or extend it. No other members of the DomaCom Fund have any rights or entitlements in relation to the capital or income of the Burwood Sub‑Fund. The rights and entitlements attached to the units of the Burwood Sub‑Fund do not confer upon Aussiegolfa and the other Part 8 associates any entitlement to income or capital that is not part of the Burwood Sub‑Fund. The use of the Burwood property by Ms Benson would have resulted in the asset being an in‑house asset if leased directly by Aussiegolfa. The investment by Aussiegolfa in the units in the Burwood Sub‑Fund effectively exposes the assets of the Burwood Sub‑Fund to the same risks that the in‑house asset rules were designed to limit and allow indirectly the assets of the Benson Fund to be accessed for present day use.

3. Accordingly, the proceeding will be relisted for submissions concerning the form of the decision to set aside (in accordance with the Administrative Appeals Tribunal Act 1975 (Cth) as may be modified by s 344 of the SIS Act) the determination under s 71(4)(b).

18.     I certify that the preceding 17 (seventeen) paragraphs are a true copy of the reasons for the decision herein of Deputy President Tony Pagone

Associate

Dated: 14 December 2017

Date of hearing:	28 November 2017
Counsel for the Applicant:	Mr M Flynn QC with Dr J Glover
Solicitor for the Applicant:	Hall & Wilcox
Counsel for the Respondent:	Mr G Davies QC with Ms M Schilling
Solicitor for the Respondent:	Australian Government Solicitor