Listed investment group DomaCom Ltd is suing the tax man to allow self-managed super fund investors to buy into properties they live in – a test case with potentially huge implications for superannuation and housing affordability.
DomaCom’s ambitions were stymied last October when the Australian Taxation Office said the company’s plans did not pass the ‘single purpose test’ for superannuation.
DomaCom uses trust structures to allow SMSF investors to buy a percentage of a property that they or their families live in. The ATO considered this creative use of trust structures to essentially allow people to gain a benefit by living in their property while holding it as a superannuation investment.
But DomaCom didn’t take that decision lying down. It moved to start an internal dispute process with the ATO. That process proved inconclusive, so now the company is asking the Federal Court to rule on the situation.
It would like the court to say that DomaCom’s structures are not in-house or related trusts for the purposes of superannuation.
To bring the case, DomaCom is financing a civil action taken by one of its clients, who has invested in an apartment built for student accommodation and would like his daughter to rent it while she completes her studies.
DomaCom CEO Arthur Naoumidis told The New Daily, “if we get the ruling in our favour then we would argue we have a precedent and we could follow it”.
However, were the courts to find in DomaCom’s favour, regulators are likely to be concerned on two counts. The purpose of superannuation could be undermined by allowing SMSF owners and their families to live in properties part-owned by their private super funds.
There would also be concern that housing affordability could be further damaged by SMSFs pouring money into residential property.
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 last year that “if it was found to be technically possible I imagine fairly soon we would find someone saying the loophole should be closed”.
DomaCom is a listed investment company with lots of units and investments. But unlike other investment companies 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 a stake in, or all of, a sub-fund, its owners can legally live in the building or rent it to their children because the SMSF would receive income from the overall revenues of the fund, not rent paid.
It would also allow children to build stakes in properties their parents bought in an SMSF through purchasing units in the sub-fund over time using their super contributions.
“The ability to use superannuation to help people into a home is clearly a topical issue in Australia and it is our belief that the DomaCom Fund can play a key role in solving this issue whilst still protecting the assets of the SMS,” Mr Naoumidis said.
