The Australian Taxation Office has fired a shot across the bows of plans by DomaCom, an investment company, to allow self-managed super fund (SMSF) investors to live in houses their funds own.
In response to enquiries from The New Daily, the ATO issued a statement signed by Assistant Commissioner Kasey Macfarlane, saying it was not considering allowing SMSFs to provide housing for members and their families.
“Ensuring SMSFs are established and maintained for the sole purpose of providing retirement benefits for members and benefits to their dependants on death, as well as ensuring compliance with the regulatory requirements and restrictions that apply to SMSFs, is paramount to the ATO’s role as the regulator of SMSFs,” she said.
“The use of any SMSF investment as a means for providing a present day benefit for members also directly contravenes other superannuation regulatory rules and restrictions that apply to SMSF investments,” Ms Macfarlane said.
Not yet resolved
But the CEO of DomaCom, Arthur Naoumidis, told The New Daily the company had “not fully resolved the position with the ATO. There is an internal dispute process under way with the ATO which should take 28 days to complete”.
The ATO responded to enquiries on the issue by The New Daily saying “due to confidentiality provisions in the Tax Administration Act, the ATO cannot comment on any individual’s or entity’s tax affairs”.
Any review would likely look at DomaCom’s investment structure and how it relates to the “sole purpose” test for super. That restricts super monies to providing retirement support and bars funding pre-retirement life.
The DomaCom structure
DomaCom is a listed investment company with lots of units and investments like many big investment funds. But unlike other funds it allows people to choose a property they want to buy into and purchase through a dedicated sub-fund.
When a property is found by would-be buyers, DomaCom organises a book build where would-be investors promise to buy units at a certain price. If enough money is raised the sub-fund buys the property, essentially through crowd funding.
DomaCom has claimed it is not restricted by the sole purpose test because it ensures when people buy into a sub-fund they are legally buying into a small part of the overall DomaCom structure, rather than buying a single asset.
What DomaCom believes is that if an SMSF buys less than 50 per cent of a sub-fund, its owners can legally live in the building or rent it to their children. Their SMSF would receive income from the overall revenues of the fund, not rent paid.
It all swings on the idea that buying units in DomaCom means investors have bought into a widely held trust, not a particular property.
Who has the last word?
Even if that idea holds water legally, the ATO and Treasury would be unlikely to let it lie.
Helen Hodgson, associate law professor at Curtin University, told The New Daily “if it was found to be technically possible I imagine fairly soon we would find someone saying the loophole should be closed”.
Zac May, policy director with Industry Super Australia, said: “I can’t comment on any specific strategy, but SMSF trustees and their advisors need to be very careful.”
“There are growing concerns about SMSFs being used for tax minimisation, estate planning, and wealth management purposes.”
“If the SMSF structure systematically underperforms and is widely used for purposes other than what policy makers intended, it is only a matter of time before there is a crackdown,” Mr May said.
DomaCom’s business model doesn’t depend on SMSF owner-occupied deals. It has crowd funded 29 properties worth about $16 million and has another 59 book builds planned on properties worth another $58 million.
It is currently raising $10 million on the Australian Securities Exchange in a public listing.
*The New Daily is owned by industry super funds.