In general, trustees of SMSFs are unable to acquire assets from related parties and may only maintain ‘in-house assets’ (i.e., assets involving dealings with related parties) when their value is less than 5% of the total value of the fund’s assets. However, an exclusion to these requirements applies in relation to ‘business real property’.
When considering whether or not a particular property is business real property, trustees usually need guidance regarding the ‘business use test’. This requires that the real property be used wholly and exclusively in one or more businesses’ carried on by any entity.
The ATO recently released a new draft ruling that contains a number of examples that highlight the importance of understanding business real property.
Letting holiday flats – no business
Ms Wilson owns two holiday flats, which she lets for short-term accommodation at a popular holiday destination. She manages and maintains the flats, which includes cleaning and repairing the flats, and financial tasks such as banking.
She and her partner set up a super fund, both becoming members of the fund. They propose that the fund acquire the flats from Ms Wilson.
The elements of repetition and continuity of acts and transactions indicate the possibility of there being a rental property investment business being carried on. However, the scale of the operation is such that it is not considered to be a business.
As there is no business conducted in respect of the premises, the property is not business real property. Therefore, the super fund cannot acquire the flats from Ms Wilson (a related party).
Bed and breakfast – business
Dean owns a house with five bedrooms and two living areas. He uses one of the bedrooms himself. He lets the other four bedrooms year-round as part of a bed and breakfast business. One living area is set aside for the exclusive use of guests. Breakfast is included in the room cost and other meals are available by arrangement.
Dean advertises his rooms with Worldwide B&B Internet bookings agency. He has a business plan, pays tax, and has three permanent part-time employees. The business has operated since Dean acquired the house 17 years ago.
In this case, a business is being carried on. Dean’s non-business use of the property is incidental and relevant to that business. Therefore, the property is used ‘wholly and exclusively’ in the business and is business real property.