There are numerous restrictions prescribed by SIS legislation that the Self Managed Super Fund (SMSF) should constantly comply with when doing investments. One of the most rigorous rules is that the assets of members; or a related party are prohibited from being acquired by trustees.
However, there are three exceptions applied to permit this related party transaction, if the asset fits within any of the three categories listed below:
- Listed security acquired at market value; or
- Business real property acquired at market value; or
- An in-house asset (IHA), with the fund’s existing IHA, does not constitute more than 5% of the fund’s total assets.
This article will focus on the second exception rule. Also, examine whether a residential property can fit the definition of Business Real Property (BRP) to be acquired by trustees of an SMSF. Broadly speaking, the residential property must satisfy the business use required to be qualified as the business real property, so that acquiring the property will not be in breach of the rule if such “carrying on of a business” can be proven to exist.
In general, the use of the property is related to the nature of business. If the granting of rights to guests which is included in the principal activity of the business. The guests accommodation in hotels, or other similar types of short-term accommodation, which is relevant to the underlying business being carried on. In this situation, it is legitimate for trustees of an SMSF to acquire units of property from members or a related party of the fund.
According to ATO, renting out properties can result in the existence of a business. If a number of properties or a block of apartments are rent out and the rent is generated, then the member will be seen as carrying on a business. As a result, those properties can be acquired by trustees of an SMSF from its members as business real property.
In addition, the engagement of the agent, such as a real estate agent, does not necessarily ruin the situation. In Re YPFD and FCT (2014) 94 ATR 484, a taxpayer who was the owner of 9 rental properties was considered to be carrying on a business, even though the real estate agent was participated in managing those properties. However, the number of rental properties might be crucial to determine whether there is a genuine business. In general, a business does not exist if there is only one or 2 rental properties involved in the activity. Though the number of rental properties is used as an indicator, whether the business is carried on should be analyzed case-by-case.
Business of a Land Developer
Lastly, if a SMSF land developer runs the business of property development, those properties may be qualified as business real property. Trustees of the fund can acquire it without contravening the regulation. Those properties are defined as the trading stock of a company and fall within the ordinary activity of the land developer. Besides, according to ATO, those properties can also be acquired when the development is in progress, or even off the plan as long as such a business is proven to be existing.
If you need any suggestions and seek assistance, call BOA & Co. accountants on 1300 952 286, our Specialist will be pleased to assist you.