SMSF trustees looking to include an asset acquired from a related party in their fund as business real property (BRP) should not assume its status is defined at a single point in time but should recognise its classification is dependant on prevailing circumstances that may lead to a breach of the in-house asset (IHA) rules, according to a specialist audit firm.
ASF Audits head of education Shelley Banton said the BRP status of a property was determined when an SMSF acquired an eligible interest in real property from a related party.
This interest was typically a freehold interest or a leasehold interest and under those real property would be considered as BRP if it met the business use test and was used wholly and exclusively in one or more businesses.
Banton noted that since BRP sat outside the IHA rules, which limit in-house assets, such as real property from a related party, to less than 5 per cent of an SMSF’s total assets, its status had to be examined every year.
“Because BRP has an exception from the IHA rules, the property must also meet the BRP test at the end of each income year,” she said in a blog post on the ASF Audits website.
“By way of example, where the property is no longer used in a business but still rented to a related party, it will become an IHA of the fund.
“Forgetting about having an enforceable lease agreement in place at all times can also wreak havoc.
“If the lease lapses through an administrative error, that will cause the IHA exception to cease and the property, if leased to a related party, to become an IHA of the fund.”
She added the status of vacant of a business real property also had to be assessed depending on its usage, particularly where a tenant leaves and the property becomes vacant.
“The property still passes the business use test and continues to comply if the trustees intend to continue leasing the property to a business,” she said.
“If the trustees decide not to rent the property to a business, it is no longer BRP.
“There needs to be a study guide available on how to pass the business use test.
“Passing the business use test is not straightforward and understanding the BRP rules is essential to ensure that any BRP acquisition complies.
“Unfortunately, meeting the BRP definition is not just a box-ticking exercise. The reason is that a holistic assessment of the facts and circumstances is relevant in every case.”
